For amateur investors, discerning what exactly differentiates
developed, emerging, and frontier markets can be challenging.
Today, we'll try to clarify some of these important distinctions
people looking to invest overseas
[caption id="attachment_59420" align="alignright" width="300"
caption="Open air market in New Delhi, India"]
are probably the easiest to identify. As the phrase itself implies,
these countries are usually the most advanced economically. As
well, they have highly developed capital markets with high levels
of liquidity, meaningful regulatory bodies, large market
capitalization, and high levels of per capita income. Developed
markets are found mostly in North America, Western Europe, and
Australasia, including nations like the U.S., Canada, Germany, the
U.K., Australia, New Zealand and Japan.
Different entities have different definitions as to what
constitutes a developed market, which can make the issue somewhat
confusing. As a result, a given country can be a developed market
according to one firm and an emerging market according to another.
For example, South Korea is a developed market
according to FTSE
, but an emerging market
according to MSCI as of 2010
Defining emerging markets and frontier markets gets a little
trickier. An emerging market is, in short, a country in the
process of rapid growth and development
with lower per capita incomes and less mature capital markets than
developed countries. It includes the famed BRICs, Brazil, Russia,
India, and China; and even the PIIGS (Portugal, Ireland, Italy,
Greece, Spain - also known by the more politically correct moniker
A frontier market is a subset of the emerging market category.
In other words, frontier markets are emerging markets, but not all
emerging markets are frontier markets. Specifically, a
frontier market is one with little market liquidity
, marginally developed capital markets, and lower per capita
incomes vis à vis the more developed emerging markets like Brazil
and China. However, because frontier markets have yet to undergo
much meaningful economic development, the potential for rapid
growth and outsized returns make these markets interesting to
Frontier markets include the CIVETS (Colombia, Indonesia,
Vietnam, Egypt, Turkey,and South Africa) and places
like Nigeria, Bangladesh, and Botswana. Like with the distinction
between developed and emerging markets, the difference between a
traditional emerging market and a frontier market can differ based
on the entity making the distinction. For example, Colombia is
considered just an emerging market by some, and a frontier market
While, in general, developed markets are considered safer than
emerging markets, and the more developed emerging markets safer
than frontier markets, this is not a rule that can be applied
unequivocally. When Singapore, Taiwan, and South Korea are called
emerging markets by some entities, and Greece and Portugal are
categorized as developed markets, it's apparent that developed
markets are not always safer than emerging ones.
When investing in foreign markets, it's important to bear in
mind the differences between developed, emerging, and frontier
markets in order to better understand the risk, liquidity, and
growth potential of a given country.