In pursuit of new investments, developed countries are turning their focus towards the booming economies of frontier nations, The Wall Street Journal reports. Fast-developing countries throughout Africa, Central and Eastern Europe and the Middle East are averaging annual growth rates five times that of developed nations.
Firms all throughout the world are looking to benefit from this discrepancy in growth possessed by frontier markets.For example,
Despite the high returns possible in frontier markets, experts advise serious caution when investing there. The markets of emerging countries are highly volatile, and while some have flourished, such as Lebanon, which has doubled in the past year, others have plummeted, such as Romania, which after years of remarkable growth has fallen 37% in this past year after having joined the European Union. There is no way to tell how these countries will perform in the future leading to uncertainty and high risk for investors.
Showing further instability in frontier markets are issues of political strife, the effects of inflation, a lack of diversification, and illiquidity.If some of these characteristics are too influential in the domestic markets, it can make investment insensible. Developing nations ties with agriculture and other high commodity prices leads to further insecurity in investment.Nigeria, for example, is flourishing from the oil fuel growth in Africa, but if oil prices fall, so does Nigerias growth.
Overall, frontier markets offer a new form of investment that can bring about high returns, yet proceed with caution, for the high level of returns is equated with a high level of risk.
