2 risks of frontier markets

ETFs make it easier for advisors to investigate frontier markets for untapped market exposures. But our research suggests such markets may convey more risks than benefits.

Here’s why.

• Low economic growth and returns

  Studies indicate the correlation of economic growth and stock returns over typical investment horizons are near zero. The relationship between these two across countries is strongly influenced by a number of factors, including:

  Growth surprises — how a country’s actual GDP growth compares with earlier expectations for growth priced by financial markets;

  Valuations — the price investors pay for a market’s expected growth at any given time; and

  Globalization — how a country’s GDP growth relates to the earnings growth of the country’s domestic public companies.

• Less than attractive correlations

  Since January 2000, frontier markets have posted attractive correlations.

  However, averages don’t tell the whole story. From 2000 to 2007, correlations between frontier markets and various asset and sub-asset classes were generally low. However, since 2008, correlations to other risky assets have increased — substantially in some cases.

Read more: Frontier market investing myths