While developed and emerging markets tend to grab the headlines, there is renewed interest in so-called frontier markets. These markets, not without risk, remain relatively untapped and offer the potential for significant long-term gains. Just ahead of unclassified markets, some frontier markets in the Asia-Pacific are on the verge of being upgraded to emerging markets.
What are the three main country classifications, and why are they so important?
Market classifications
The term market classification relates to a country's market economy, taking in various factors such as:-
• Size of economy
• Openness to foreign ownership
• Ease of capital movement
• Efficiency of market institutions
• Transparency
Each country is ranked on these factors, the higher the rating the more developed the market. This then brings us onto the three (four) recognised market classifications which are:-
Developed markets
There are many examples of developed markets, including the US, Canada, France and the UK. However, there is some controversy regarding the classification for China, many believing it should be classed as a developed market. As the term suggests, these markets offer a high degree of liquidity, transparency and openness to foreign investment.
Emerging markets
While Asia takes in emerging markets such as Thailand and South Korea, we also have the likes of Mexico, Brazil, Peru and Argentina across Latin America. These are countries which offer a degree of openness, transparency, etc. but due to some restrictions, or market size, are not deemed to be developed markets.
Frontier markets
There are many frontier markets across the world, but this classification relates to Cyprus, Bahrain, Kuwait, Oman, Kazakhstan, Sri Lanka, Vietnam, and Bangladesh in the Asia-Pacific region. Frontier markets, often referred to as pre-emerging markets, have the makings of emerging markets but have not yet reached the required levels.
An additional group, termed "unclassified", relates to markets that do not yet qualify as frontier markets.
Why is market classification so important?
Many previously unclassified, frontier and emerging markets benefited hugely from international investment and business collaborations. A more open approach to foreign investment has seen numerous countries move up the market classification pecking order. This can have huge implications such as:-
• Enhancing international trade
• Improving business efficiency
• Increased liquidity
• Enhanced regulatory framework
• International exposure
For many investors looking at frontier and emerging markets, confidence, liquidity and openness to foreign investment are the key factors. Vietnam is the perfect example of a frontier market that has seen a significant change in regulations, openness to foreign investment and ultimately liquidity. Indeed, many believe that Vietnam is on the verge of being upgraded to an emerging market status.
The hidden value of frontier markets
It is fair to say that frontier markets have a higher risk/reward ratio than emerging and developed markets. There tend to be issues with:-
• Liquidity
• Transparency
• Regulations
• Economic risk
However, we have seen many examples of countries moving from unclassified to frontier then emerging market. Subtle but ongoing improvements in the above areas can assist individual companies, industries and economies. This is where our "boots on the ground" approach to investment in the Asia-Pacific region pays enormous dividends for our client base. We know our markets!
International trade
Here at Global Investment Strategy Hong Kong, we utilise the latest technology to provide low latency execution-only trading services. Our international clients benefit from our deep-seated understanding of the Asia-Pacific region, taking in frontier, emerging and developed markets. We have a dedicated trading desk based in Hong Kong, open across global trading hours to meet multi-asset trading requirements.Can we help you unlock the value of frontier markets?