'Frontier Market’ is an economic term coined by Farida Khambata of the IFC in 1992 – it is commonly used to describe a subset of emerging markets.
As emerging markets began to mature, the term frontier markets was used to describe counties that were investable but had lower market cap and liquidity than the more developed emerging markets
The implication of a country being labeled as ‘frontier’ is that, over time, the market will become more liquid and exhibit similar risk and return characteristics to the larger, more liquid developed emerging markets. They are the up and coming emerging markets.
Frontier markets are seen as potentially riskier investments but ones that offer high potential returns. However, they give a more complete picture of the emerging market sub-set. Their main attractions lie in their high growth prospects, attractive valuations and sound country balance sheets.
Frontier markets account for 1% of global equity market capitalisation but around 6% of world economic output (Source : IMF, MSCI). Similar relationships used to exist in emerging markets but the gap has narrowed as equity markets have developed.
The number of listed securities in the frontier markets is limited. There may be a large number of so-called locally listed securities but trading is often restricted to a smaller number where there is a decent free float.
Capital markets in the frontier territories are relatively underdeveloped but already stand at around USD 500 billion, with daily trading volumes of over USD 300 million. Brazil, as an example, has seen its market cap grow from USD 100 to almost USD 1 trillion in the past ten years.