What is an emerging market ? What is a frontier market ?

Starting a blog on investment in emerging and frontier markets supposes some clarification on the nature and scope of the aforementioned concepts regardless of the confusion surrounding them.

The term "emerging markets" was coined in the early 80s by an economist at the world bank called Antoine Van Agtmael arguably as a substitute for "developing markets" in order to attract investors from developed countries by insisting on the growth opportunities offered by developing markets. Hence, in its broadest sense, the term "emerging markets" may include such diverse countries as China, Tunisia, Peru or Croatia.

Further, the term "frontier markets" was coined in the late 90s to designate the developing countries that were not included in the first wave of "emerging markets" because of various economic, institutional, or political factors. One of these factors is the under-development or the lack of openess of their capital markets, and more generally the lack of institutional development sustaining growth as compared to other more mature emerging economies.

As an illustration, the MSCI Barra Emerging Markets Index, an established asset management industry benchmark, is composed of company stocks from the 25 following countries : Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey.

In addition, MSCI Barra also provides a Frontier Markets Index which includes 19 countries : Bahrain, Bulgaria, Croatia, Estonia, Kazakhstan, Kenya, Kuwait, Lebanon, Mauritius, Nigeria, Oman, Qatar, Romania, Slovenia, Sri Lanka, Tunisia, Ukraine, United Arab Emirates, Vietnam.

The case of countries like South Korea, Taiwan, or Israel is controversial as they already reached the status of developed countries but are still sometimes considered as emerging markets because of their historical belonging to that class and/or the prevailing political uncertainties and risks.

There are some common caracteristics to the countries viewed as emerging or frontier markets.

On the positive side, these countries are generally growing faster than developed economies and their domestic markets present huge opportunities both for local and for foreign companies.

On the negative side, their economic growth is more volatile with sometimes large cyclical swings and violent boom & bust episodes. These countries are also more prone to go through episodes of political instability, violence, and war.

All in all, the definition and scope of emerging and frontier markets should not be taken for granted for ever but rather viewed as a convenient mental scheme which needs to be renovated and cleansed every now and then.

Our focus will be on equity investment in large emerging markets such as the BRIC (Brazil, Russia, India, China) and a handful of other key emerging economies : Mexico, Indonesia, South Africa, Egypt, Ukraine, etc.

In order to identify investment opportunities in these markets we will adopt an approach combining top-down macroeconomic and political analysis with bottom-up sector and company analysis.