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Frontier emerging markets (FEMs) encompass over 130 diverse and heterogenous nations. They are generally smaller, less developed and less accessible than their emerging market peers, yet account for 19 of the 20 fastest-growing nations globally.1 Their population is expected to grow by 37% by 2050.2 We believe this rapid growth sets the foundation for solid development, which will make them a larger part of the global economy, representing an attractive investment opportunity.

Key takeaways:

  • FEMs encompass over 130 diverse and heterogenous nations. They are generally smaller, less developed and less accessible than their emerging market peers, yet account for 19 of the 20 fastest-growing nations globally.
  •  FEMs have a large, young and growing population, which by 2050 is expected to grow by 37%. Almost three-quarters of economic growth in these economies is derived from consumption, which is expected to grow significantly in the 2023–2028 period.
  • Contrary to investor perceptions, correlation among FEMs is lower than among emerging markets (EMs), due to their heterogeneous nature. This can lead to lower portfolio volatility. Our analysis of drawdowns over the past five years indicates FEMs have lower drawdowns relative to EMs. 
  • FEM investors can benefit as the equity index of a country grows to the point of being reclassified to EM status. Investors can thus realize these gains and recycle them into undervalued opportunities in the index.

In this report, we focus on investable early-stage developing FEMs. They are often said to be at the stage of development that today’s emerging markets were at 25 years ago, with many of them having the same characteristics as emerging markets including India, Brazil and China.

Endnotes

  1. Source: World Economic Outlook Database, International Monetary Fund. April 2023. This ranking is based on real GDP growth and excludes countries with a population of less than 10 million as well as Iraq and Afghanistan.
  2. Sources: UNDESA, Macrobond. UN World Population. There is no assurance that any estimate, forecast or projection will be realized.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.

Currency management strategies could result in losses to the fund if currencies do not perform as expected.

Diversification does not guarantee a profit or protect against a loss.

The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated.

Companies in the infrastructure industry may be subject to a variety of factors, including high interest costs, high degrees of leverage, effects of economic slowdowns, increased competition, and impact resulting from government and regulatory policies and practices.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. All investments involve risks, including possible loss of principal. There is no guarantee that a strategy will meet its objective. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where a strategy invests in emerging markets, the risks can be greater than in developed markets. Where a strategy invests in derivative instruments, this entails specific risks that may increase the risk profile of the strategy. Where a strategy invests in a specific sector or geographical area, the returns may be more volatile than a more diversified strategy.

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