Last Updated on April 13, 2026
Overview – The Interesting Case of Emerging and Frontier Markets
It doesn’t take very long for investors to realize that not all countries where they can invest are created equal.
Some countries feature very advanced economies and robust financial markets, drawing strong interest both domestically and internationally. Other countries have very undeveloped economies, which usually also means less-than-appealing financial markets.
But what about the countries in between? That is, countries that aren’t convincingly “developed”, but aren’t totally destitute. This middle group is where the so-called emerging and frontier markets are found.
In years past, emerging and frontier markets were largely ignored by investors due to their small size and limited opportunities. However, that was before. Emerging and frontier markets are now significantly larger, draw lots of attention, and can, in many instances, offer more attractive opportunities than their developed counterparts.
If that’s the case, there are some things investors may want to know before getting involved in these relatively overlooked yet very exciting places.
What Exactly Are Emerging/Frontier Markets?
Before continuing, what exactly are “emerging” and “frontier” markets? To understand what they are, we must first look at the two opposite ends of the market spectrum: developed and least developed.
“Developed” markets are financial markets of countries that feature advanced economic foundations, such as high GDP per capita, high levels of industrialization, and well-developed infrastructure (roads, airports, sea ports, internet connectivity, cellular service) that enable the efficient transfer of goods, services, and capital. Common examples are the US, Canada, the UK, Japan, and Singapore.
“Least developed” markets are, as you may suspect, the opposite of developed ones: low GDP per capita, low levels of industrialization, and insufficient infrastructure. Afghanistan, Haiti, and Sudan usually fall under this group.
Having established these two ends, we can now fill in the gap.
“Emerging” markets exhibit some characteristics of developed ones (high levels of industrialization, well-developed infrastructure, etc.), but not comprehensively enough that they can be called developed yet. Some of the world’s largest economies, such as Brazil, Russia, India, China, and Mexico, are categorized as such.
Meanwhile, “frontier” markets are considered to be a notch below emerging ones, primarily due to them being generally riskier and less accessible to investors. Some examples include Ukraine, Slovenia, and Sri Lanka.
Although “emerging” and “frontier” are sometimes used interchangeably, it’s important to remember that they are two distinct entities, which can make a difference in an investor’s decision-making.
What’s Wrong With Sticking to Developed Markets?
Let’s take a few steps back and address a question that may have come to mind: what’s wrong with investing solely in developed markets?
Developed markets attract a significant portion of the world’s investable capital, and for good reason. Most of the world’s largest companies are listed on at least one of the stock exchanges in these countries, there are many potential investment opportunities, and the financial markets in these countries usually perform well.
With these reasons in mind, why would any investor entertain the idea of looking elsewhere?
First, because of the size and reputation of developed markets, it’s unsurprising that many of the world’s investors, from small retail investors to the world’s largest institutional players, focus their attention here. Because of this, developed markets are becoming (or, arguably, have become) “saturated”; that is, too many investors are trying to look for excellent, fairly priced investment opportunities, but not enough of them to go around (hence the need for investors to have a blue ocean investment strategy).
For value-minded investors, this means many investment opportunities are already trading at or above their intrinsic value, making it difficult for them to find bargains. Those looking for “hidden gems” will find it increasingly harder due to the sheer number of other investors who are trying to do the same thing, leaving very few, if any, strong prospects to remain “under the radar” for long.
Second, many of the companies traded on the exchanges of developed markets are at or near maturity, making new avenues of growth increasingly harder to find. For example, Apple, Amazon, Microsoft, Google, and other tech giants are all investment darlings, but have already reached the point where they have exhausted almost all areas of future growth due to them already having a global presence and a very comprehensive suite of products/services.
Barring any revolutionary breakthroughs, these giants won’t be growing rapidly anymore, meaning investors cannot realistically expect the share prices of these companies to increase rapidly forever, either.
This same phenomenon of “giant companies facing increasingly limited growth prospects” can be found in other developed markets, too, but to varying degrees.
Developed markets have, and will continue to be, a place that many investors will do business in. However, choosing to invest solely in these countries may end up costing investors potentially higher returns and safer investment choices down the road.
This is where emerging and frontier markets enter the picture.
Understanding the Appeal of Emerging and Frontier Markets
After having discussed the limitations of investing solely in developed markets, what exactly makes emerging and frontier markets increasingly appealing to invest in?
The first, and arguably primary, reason is that these countries may be home to future investment giants; if investors successfully identify and invest in these prospects now, the long-term gains they stand to potentially earn will be substantial. This is because many emerging and frontier markets are currently experiencing robust economic growth (measured in real GDP), so the logic that investors follow is usually this:
“Rapid economic growth means that individual businesses are growing rapidly, too. Assuming the robust economic growth continues and that individual companies continue to steadily grow, they may one day become massive companies, and by extension, potential investment giants. By identifying these future stars early and holding for the long-term, the capital gains and any accumulated dividends will one day be substantial.”
This logic has worked in the past, specifically with the Four Asian Tigers (Singapore, Hong Kong, Taiwan, South Korea). Although these countries are all developed markets now, they were once classified as emerging in the second half of the 20th century. Investors who recognized the potential of these countries and invested in them early are most likely patting themselves on the back today.
Imagine being an early investor in Samsung, LG, TSMC, or ST Engineering and watching them grow into the behemoths they are today. Because of this historic success, it’s no wonder that many investors are turning to other emerging/frontier markets in Asia, such as the Tiger Cub Economies, to try to achieve the same thing.
The second major reason why investors may be interested in emerging/frontier markets is due to the unique diversification they offer.
Most investors are aware of the importance of portfolio diversification and understand the underlying theory behind it. However, most investors fall short of having “truly” diversified portfolios because they limit their investment activities to only one country or a handful of other, highly similar ones.
For example, imagine an investor whose portfolio holdings are spread out between Canada, the US, and the UK. Although these are three distinct countries, in practice, they are essentially all the same: all of them are Western developed markets, with several companies operating in one another’s countries, and whose economies are closely intertwined with one another. If one of these countries’ financial markets suddenly tanks, chances are the other two will also (or at least be greatly affected).
Meanwhile, many of the world’s emerging and frontier markets are not of Western origin and instead hail from South America, Africa, and Asia. These markets are less intertwined with their developed counterparts, allowing investors to hedge against any adverse events in developed markets.
Just because developed markets are facing turmoil doesn’t mean emerging and frontier ones are too, which is precisely the type of “true” diversification that many investors lack.
Many investors face limitations on their portfolios that won’t be solved by operating solely in one type of market. By tapping into the potential offered by emerging and frontier markets, investors may be able to address the limitations they currently face.
Emerging and Frontier Markets Present Unique Risks to Investors
Despite the appeal of emerging and frontier markets, investors need to be cognizant of the unique risks that operating in these markets presents.
Earlier, we discussed how many investors are drawn to emerging and frontier markets due to their robust economic growth, presenting them with an opportunity to potentially experience substantial, long-term investment gains. However, there is no guarantee that this strong economic growth will continue for the long-term.
It’s tempting to look at an emerging market experiencing 7% real GDP growth in the past several years and to believe that this same growth will continue for several more. But any investor knows that so much can happen that can derail even the most optimistic economic forecasts (a topic we have looked at before).
Domestic political affairs, geopolitical developments, unexpected natural disasters, unforeseen man-made disasters, black swan events (like the COVID pandemic), or just fundamental changes in how the global economy and society function: so many things can derail an emerging or frontier market’s otherwise stellar growth, effectively ruining an investor’s plan to invest in these places.
Of all the aforementioned risks we just listed, there is one that stands out in terms of its current prevalence and impact, and that is “domestic political affairs”.
One of the things most investors take for granted in developed markets is the political stability they offer. The last thing investors want is for a country’s government to constantly change (whether by force or through political infighting), its politicians making poor economic policy decisions, for new, unexpected legislation or regulations to catch them by surprise, or worst of all, for a country’s government to collapse entirely (though arguably this is very uncommon).
Instability is one of the archenemies of investing because it prevents investors from creating any sort of long-term plan or vision due to the constant threat of everything suddenly being flipped upside down. Many countries continue to be classified as emerging and frontier markets because their domestic politics are still a cause for concern, even if they are experiencing robust economic growth.
One of the potential benefits we previously discussed of investing in emerging and frontier markets is the diversification they offer. More specifically, to “dodge” or at least “decouple” a portion of their portfolios from any adverse events in developed markets.
However, the opposite can also happen: emerging and frontier markets may experience major economic upheaval that developed markets may hardly notice, if at all. A historical example of this is the 1997 Asian financial crisis, which rocked much of East and Southeast Asia.
No country is immune to economic shocks, but the risk that’s unique to emerging and frontier markets is that they may not have the means to recover like their developed counterparts due to their relatively more unstable economies and certain institutional weaknesses (i.e., poor government response, overly draconian policy decisions, etc.)
These are just some of the risks investors may face, but no matter which ones they encounter, the underlying theme is the same: failure to understand the unique risks that emerging and frontier markets present may end up negating whatever benefits there are to be gained from them.
Wrapping Up
Many investors choose to keep most, if not all, of their capital tied up in developed markets. While there’s nothing inherently wrong with doing this, investors may inadvertently be limiting their growth and/or shouldering more risk than they think.
Choosing to expand their horizons to emerging and frontier markets may help grant investors the edge they need by opening up a world of new investment opportunities. Doing so may also provide investors with “true” portfolio diversification by decoupling their portfolios from the events of developed markets.
Despite its appeal, investors who choose to get involved with emerging and frontier markets must understand the unique risks they present. Failure to do so may leave investors worse off than when they first set foot in these markets.
