While the Nova Scotia Pension Services Corp. isn’t currently invested in frontier markets, the institutional investor is set to take its first steps towards investing in the sector.

“Step one is getting [the board] more comfortable with frontier markets,” says Steve Mahoney, the organization’s chief investment officer, which includes the N.S. Teachers’ Pension Plan, the Public Service Superannuation Plan, the Members of Legislative Assembly Pension Plan and the Sydney Steel Corp. Superannuation Fund. “Step two is going through an [asset liability management] study to see how [frontier markets] fit within the portfolio and step three is starting to implement it by looking for firms to work with.”

Frontier markets would offer the N.S. Pension Services Corp. access to potential high-growth areas of the world, beyond its investments in developed and emerging markets, he says, noting the market also provides opportunities for investments tied to environmental, social and governance factors.

Read: Which emerging and frontier markets are institutional investors considering in 2022?

The MSCI frontier markets index by the numbers

• The index’s market cap was $75.3BN as of June 30.

• At 28.2%, Vietnam was the largest single nation by country weight in the index.

• Financials accounted for 37.5% of the index’s sector weight.

“Some [frontier markets] could accelerate into emerging and then developed markets, so you’re looking for countries where there are tailwinds in effect that will give you higher returns. . . . You could also argue that you are participating in some areas of the world where investment capital can help advance good ESG practices; for example, if you’re empowering a country to have better access to capital that could lead to better businesses and entrepreneurs to support their family’s or community’s wealth, while still achieving target returns for the plan.”

Amid the lingering impacts of the coronavirus pandemic and the churn of geopolitics, frontier markets are in a state of constant evolution.

Vietnam and Philippines

As China continues to grow its economic and political strength, it’s lifting up neighbouring markets. Simultaneously, geopolitical tensions between China and its trading partners — particularly the U.S. — are also driving investment in Asia’s frontier markets.

This effect is perhaps best exemplified by Vietnam, where many of the world’s major electronics producers — including Apple Inc., LG Corp. and Samsung Electronics Co. Ltd. — have expanded their manufacturing divisions. The country’s political system, largely dominated by a single party, also provides a degree of stability for investors, says Ahmed Awny, senior executive director and emerging markets equity portfolio manager at Franklin Templeton.

“LG alone currently exports well over $1 billion per month out of Vietnam and it continues to grow because it’s very easy to continue that kind of a path [amid political stability], despite the [recent] rounds of elections in Vietnam.”

Read: Institutional investors looking to Asia as economies start to bounce back from pandemic

Investment opportunities are also growing in the Philippines, he says, specifically in the business process outsourcing sector, which includes Accenture, Amazon.com Inc., Citibank, the Goldman Sachs Group Inc., JP-Morgan Chase & Co. and Morgan Stanley.

“They have a million Filipinos working 24/7 for all of the Western banks. Most of their call centres, database centres and backoffice operations are already in Manila and [the surrounding area], so they already have a very healthy set of ingredients with a formula of success.”

For both the Philippines and Vietnam, Awny notes these economies’ foundations are built on a very large and very young population that continues to grow and has money to spend.

Kazakhstan and Georgia

With Russia’s ongoing invasion of Ukraine disrupting Eastern European supply chains, the revival of traditional Central Asian trade routes is opening up investment opportunities.

James Bannan, manager of the frontier markets portfolio at Coeli Asset Management, says the unpredictability of the invasion — exemplified by the brief uprising of mercenary forces contracted by the Russian army — is having a prolonged destabilizing effect on the region, with countries such as Kazakhstan and Georgia poised to benefit.

A timely opportunity

With frontier markets trading at historically low valuations relative to developed markets, the lower price may present long-term investors with an attractive entry point to the sector, says Kathrine Husvaeg, co-head of equity portfolio management at Russell Investments Group.

While persistent risks remain, some are well known, especially around China and geopolitics, which are already reflected in asset prices, she adds. “We are observing many asset owners reassessing their exposure to the asset class with renewed interest amid a backdrop of slowing growth and a much-anticipated recession in many developed markets.”

“The old silk route is opening up again, linking Central Asia — and China in particular — with Europe. Companies are looking for routes that don’t have to go through Russia and that benefits a small trading country like Georgia.”

While Georgia has been part of the investment manager’s frontier markets portfolio since 2012, it became increasingly popular with Western companies in recent years due to a series of economic reforms and recent sanctions against Russia by the U.S. and Europe. “They’ve essentially been doing all the economic reforms that Russia hasn’t done. [Georgia] has a very pro-Washington, D.C. set of policies that has attracted a lot of funding from the U.S. and western Europe.”

Similarly, while Coeli has maintained investments in Kazakhstan for several years, the Russia-Ukraine conflict is positively impacting the country’s commodity prices, particularly oil and gas and uranium. The importance of Kazakhstan’s economy was underscored by a recent visit from Chinese President Xi Jinping. “When travel outside of China resumed, Kazakhstan was the first country he visited, reaffirming that its sovereignty needed to be respected,” says Bannan.


While Mexico isn’t new to institutional investors, several political and economic developments are enhancing an already strong frontier market.

Jin Zhang, a portfolio manager and senior research analyst at Vontobel Asset Management Inc., says increasing tensions between the U.S. and China have led to the nearshoring of supply chains in Mexico, particularly for industries like automobiles and manufacturing. This phenomenon overlapped with the 2020 introduction of the United States-Mexico-Canada Agreement, which replaced the North America Free Trade Agreement.

But it isn’t just U.S. investments that are enhancing the market. “The money’s coming from a lot of different countries,” says Zhang. “There’s a lot of Asian and European companies investing [and, in vehicle manufacturing], there’s a lot more known brands and important components coming from Mexico.”

Read: 2022 Top 40 Money Managers Report: Geopolitics roaring back into focus for institutional investors

Nearshoring, along with a return to regular travel trands, is also driving an increase in domestic and international air travel, which, in turn, is creating opportunities for investors in Mexico’s airport management firms.

“These airports are seeing more flights coming from the U.S. as well as Europe,” says Zhang. “There’s increased tourism and business travel and family visits and, as a result, [Mexico’s airports] are seeing double-digit growth.”

The Middle East

With abundant resources — particularly oil — underpinning regional currencies, the Middle East is a mainstay of frontier market portfolios, particularly the countries of the Gulf Cooperation Commission — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

“When you’re investing in frontier markets where inflation is out of control, you’ll see currency depreciation or just not outright devaluation over a period of time,” says Zhang. “But the GCC countries’ currencies don’t really fluctuate [and] that’s a very important safeguard.”

In addition to high per-capita gross domestic product, Saudi Arabia is undergoing a degree of social reform, particularly in regards to the status of women, subsequently expanding economic and consumer opportunities. As an example, Zhang points to the Americana Group, which operates several North American fast food chains across the six GCC countries and in several other markets in Africa and Asia.

“This company is hiring people that are now able to go to work without having their husband drive them to work. With increased social mobility, there’s also more [demand] for services such as restaurants.”

Latin America and Africa

While the line between frontier markets and emerging markets is often blurred, frontier markets are typically less developed, have weaker institutions and rely heavily on external financing and borrowing, says Neeraj Arora, an emerging markets sovereign research analyst at MFS Investment Management.

Key takeaways

• Geopolitical tensions are driving investments in frontier markets, especially in Asian economies.

• Similarly, social change is continuing to impact frontier markets in the Middle East.

• While frontier markets provide diversification, institutional investors can also benefit from the potential for long-term structural growth and alpha.

Frontier markets also often differ in their choice of monetary policy and how they respond to external shocks, which have been in no short supply over the last three years. “Since 2020, you’ve had a COVID shock and then you’ve had the [U.S. Federal Reserve] tightening [monetary policy]. . . . Going into the pandemic, some frontier markets’ balance sheets were already stretched and they had high debt levels.”

Read: How Saudi Arabia’s inclusion in major indexes will affect emerging market exposure

Several Latin American economies, including the Dominican Republic, Guatemala and Paraguay, were among the frontier markets weathering the storm by pursing prudent fiscal policies to preserve strong sovereign balance sheets.

Similar scenarios have played out in the hard currency space in several African frontier markets, with countries such as Angola, Ivory Coast and Senegal emerging from the pandemic with increased economic stability, says Arora. “In Angola, for example, there was an election and the new administration went to the [International Monetary Fund]. They pursued the right policies during the pandemic.”

A similar comeback may be on the horizon for Nigeria, he adds. In June, the country’s new government removed a costly fuel subsidy and devalued the naira, Nigeria’s national currency, to counter historic overvaluation.

A long-term view

While frontier markets provide institutional investors with a degree of diversification, it doesn’t represent the entire picture.

“The problem is [diversification] isn’t consistent and, in periods of stress, when you arguably want diversification the most, you won’t necessarily get it [from frontier markets],” says James Jackson, a partner overseeing investment manager research at Aon.

Read: Which frontier markets are institutional investors exploring?

Instead, he suggests institutional investors expand their focus on frontier markets to the potential for long-term structural growth and alpha. Indeed, today’s frontier markets share many similarities with emerging markets in the early 2000s, he adds.

“That was a period where emerging markets actually performed very well, particularly China, which performed consistently over a number of years and much better than emerging markets have performed perhaps over the last decade. If we look at some of the things that drove that strong performance, these were markets that had favourable population demographics. It was also a period where developed markets were having a bit of a slowdown and you also had some positive thematics around commodity price, strength and supply chain reform.

“With investments into new areas like electric vehicles and clean energy, there’s a lot more traditional [capital expenditure] required for certain commodities — and this is playing to frontier markets’ strengths.”

Blake Wolfe is the managing editor of Benefits Canada.