When it comes to real estate and property, most of us have heard about emerging markets, yet there are a few that are aware of frontier markets. While some may use these interchangeably, they are in fact different.
Every investor or property buyer knows the advice to buy low and sell high, which is why experienced investors always judge places before investing. One of the main judging factors is the market quality, and that’s why it is important to know about emerging and frontier markets.
Aggressive or risk-taking investors tend to invest in emerging and frontier markets as a way of getting larger capital gains in the long-term. It’s important to take a look at some key differences between emerging and frontier markets.
Emerging markets explained
Emerging markets offer adequate liquidity and stability and are good for long-term investors seeking a return on their capital. But you must keep in mind that different entities define an emerging or a developed market differently. Some emerging markets show characteristics of a developed market, which makes it even more difficult to differentiate. Emerging markets are also important because they play a part in the global economy.
Frontier markets explained
Frontier markets are less economically developed than emerging markets, but they can not be included in low economy countries. A frontier market is less established than an emerging market. They are considered the riskiest markets for investment, but they are still considered viable investments.
Frontier markets are less accessible than emerging markets and riskier. They offer less liquidity than emerging markets, and they don’t have developed stock markets. Investors have to face lots of trouble while establishing an asset in a frontier country, including political instability and large currency fluctuations. The main benefit of frontier markets is that they can offer higher returns than emerging ones if things go well.
Emerging vs. frontier markets
Emerging markets can be defined as countries that aren’t fully developed but are instead continually developing. Some examples of emerging markets include BRIC nations (Brazil, Russia, India, and China), Ireland, Portugal, and Spain.
MSCI, an American finance company, emphasizes three main topics that define a market: economic development, size and liquidity requirements, and market accessibility criteria. Every June, MSCI announces the results of its evaluation of the equity markets for countries worldwide. MSCI considers Indonesia, India, Mexico, Peru, Poland, Qatar, South Africa, China, Thailand, Taiwan, and many other countries as emerging markets while Croatia, Estonia, Bahrain, Kenya, Bangladesh, Vietnam, Zimbabwe, Jordan, Mauritius, Morocco, and some other countries in the category of frontier markets. This list, however, is constantly changing year by year.
Russell Investments looks at two main criteria before analyzing a country’s market status: GDP per capita and ease or safety of accessing the equity market. According to Russell, the biggest advantage of investing in a frontier market is that investors can find very inexpensive yet fast-growing companies with attractive valuations. Still, certain risks such as illiquidity, inefficiency, and volatility hamper the investment options.
Most of the world’s real estate trends center around the largest continent, with billions of dollars invested around Southeast Asia. From the early 2000s, many frontier markets in Asia have gone on to become emerging ones, and some markets are even on the verge of becoming developed.
Emerging markets in Asia are widely circulated throughout the continent, mostly gathering around the southeastern side. Frontier markets are mostly centered around Mongolia, Srilanka, and Pakistan.
But while judging any country’s real estate investment trends, you should not make your decision by looking at the country’s annual GDP. Instead, it would be best if you looked at the country’s GDP per capita and other economic assets. For example, India’s overall GDP is greater than Canada’s, but the ladder is considered a developed market while the former is considered an emerging market for investors.
The difference between both markets
- Sectors in the stock exchange — The stock exchange of frontier markets is mainly dominated by larger companies and is not as advanced as emerging markets. The stock exchange companies of frontier markets also share a large chunk of the market cap. Emerging markets are more broadly spread than frontier ones and several industries like agriculture, manufacturing, services, transportation, IT, education, cultural prospects, and others contribute to the stock exchange.
- Capitalization of the market — The market capitalization of emerging markets contributes almost 10% of global stock exchange values while frontier markets don’t even contribute 1%.
- Liquidity — Frontier markets generally have many political, social, or even economic restrictions that don’t allow many foreign investors to invest or buy property in those countries. Frontier markets also offer less liquidity than emerging markets. On the other hand, emerging markets give you easier access to investment.
- Investment products — Frontier markets are currently developing in terms of the variety in trading through the stock exchange but still, they haven’t been able to achieve the same level as emerging markets.
Emerging markets and frontier markets are continuously changing and developing into better ones. They both have their own advantages and disadvantages, giving you completely different opportunities.
Ultimately, it is your duty to analyze everything and determine the best type of market for your investment needs. However, whatever the case may be, looking to which countries have the most potential in both of these markets can help with your investments.