Finding the Next China
Wall Street calls these emerging markets that have not fully emerged, “frontier economies.” They include such nations as Peru, Nigeria, Croatia and Kazakhstan. Typically, these frontier environments are characterized by very fast growing economies combined with very small or hardly-existent equity markets. For example, at the Ugandan Securities Exchange, the average daily volume in terms of dollars is only around $200,000. Add this to the often unstable political environments, and you have reason why these aren’t tourist hot spots.
But there are many positives to these frontier markets – many are rich in natural resources. As the long term global demand for oil, natural gas, gold and other commodities continues to increase, the prospects for growth in these nations is promising. In addition, frontier markets provide the low correlations that places like China and India used to provide. Comparing the three major international indexes, The MSCI World Developed, MSCI Emerging and S&P Frontier, to the S&P 500, we see that correlations are as follows, 0.95, 0.69 and 0.20, respectfully. (For more, see Go International With Foreign Index Funds.)