Why frontier markets deserve a closer look

Vietnam is one of the world’s fastest-growing economies. It is expanding at around 8% per year*, supported by shifting global supply chains, its manufacturing prowess and a nascent consumer economy. Foreign direct investment is growing by over 15% a year*, as global companies scramble to grab a share of its growth. It should be an ideal spot for a growth-minded investor to go hunting. 

But investors generally won’t get access to Vietnam through an emerging market fund, or at least, the weighting will be so small as to be insignificant. Instead, Vietnam is classified as a ‘frontier’ market, and usually only available through specialist, active frontier market funds. 

What is a frontier market?

Frontier markets are those too small or illiquid to be classed as emerging markets, and often fly under the radar for investors. They can be found in Latin America, Africa, Asia and the Middle East, and even pockets of Europe. Together they represent 16% of the global economy, and around one-third of the global population**. For investors, the risks – weaker institutional frameworks, greater volatility – are often outweighed by the stronger growth and diversification on offer. 

They are difficult to analyse, which means many investment groups simply pass them by. It is often far easier to find analysts willing to jet to Silicon Valley to chat to the tech bros at Meta or Alphabet, than those who want to investigate a uranium company in Kazakhstan. These are tougher markets, with less available information, where fund managers need to get their hands dirty to uncover local opportunities. 

Frontier markets will have different complexities. While some of them will be low income – notably many African countries, including Kenya, Ghana, Rwanda, and Côte d’Ivoire – this is not universally true. Africa, Morocco and Egypt are relatively wealthy. Iceland has a higher GDP per capita than the UK, but is still considered a frontier market because of its small size and the low liquidity in its equity market. Many of the Middle Eastern countries were considered frontier markets in spite of their vast oil wealth because they had constraints on foreign investment, though recent reforms have seen Saudi Arabia, UAE and Qatar upgraded to emerging market status. 

Why invest in frontier markets?

One of the key reasons to be interested in this region is its growth potential. Johannes Loefstrand, manager on the T. Rowe Price Frontier Markets Equity fund, says: “These countries are developing from a very low base. What’s fascinating is that these are the most overlooked markets in the world – they are full of hidden gems benefiting from the structural growth of these economies. In fact, over the past 10 years 18 of the 20 fastest-growing economies in the world were in frontier markets.”

He points to the growth of Vietnam: “The first time I went, the middle class was 15 million. Now it is 40 million and by 2030, it is forecast to be 80 million. It has been a huge success story and we expect this to continue. The government has changed radically and reduced bureaucracy, making it more efficient. It is also embarking on infrastructure growth.” This is likely to support growth for years to come, he says. 

The IMF forecasts that low income developing countries will grow at an average of 5% in 2026. That outpaces conventional emerging markets by 1.1%. Among the major emerging economies, only India comes close to the growth seen in some frontier markets. These countries often come with a demographic dividend that can help supercharge their growth for long periods. 

Diversification is another important characteristic of frontier markets. These smaller markets tend to be less integrated into the global financial system, meaning they often dance to their own tune. Economic performance is often driven by domestic factors and there may be a stronger relationship between economic growth and stock market growth.

This means that there is a relatively low correlation between individual frontier markets, and also with major emerging and developed markets***. So they can bring stability to a portfolio. The MSCI Frontier Markets index has lower volatility than comparative emerging market indices over the past five years****. Johannes says: “It’s not that Vietnam is not volatile, or Romania is not volatile, it’s that they’re not connected to each other. For the fund I manage, it cushions out the volatility.” 

Investors can participate as countries industrialise, urbanise, improve their political systems and governance. Ultimately, some companies will move from frontier to emerging markets, bringing significant capital flows. This has already been seen in Saudi Arabia, and part of what is driving the Vietnamese market is the anticipation that it might be promoted to the emerging market index later this year. 

How to invest in frontier markets

Frontier markets funds can look very different and the sector rewards active management. It is largely overlooked by many international investors and the prize is to find hidden gems through on-the-ground research. As a result, frontier markets funds tend to be distinct from each other and from the index. 

The MSCI Frontier Markets index has around 28% in Vietnam and another 14% in Morocco, plus 11% in Romania****. The T. Rowe Price Frontier Markets Equity fund also has a large weighting in Vietnam, but also has significant weightings in Kazakhstan, Bangladesh and Slovenia^. 

Certain sectors will feature heavily in frontier markets funds, largely because it is often specific sectors that list first. While the idea that it is always ‘banking, brewing and cement’ companies that list first, may be a little out of date, financials are 37% of the index^, and are often a good way to play economic growth. 

Johannes says: “Commodities are still a theme for frontier markets, but much less than people assume. The asset class used to be dominated by the Middle East, which was oil dependent.” He points out that Vietnam and Bangladesh are not commodity-dependent markets. Instead, they export manufactured goods. Kazakhstan is more dependent on commodities for growth. He says these markets tend to be eclectic, and making generalisations is difficult. 

There are risks, of course. Liquidity can be an issue: if investors all bolt for the exit at the same time, it can put a strain on countries’ capital markets and their currency. Equally, political systems can be fragile, and may be vulnerable to a change in government. For this reason, frontier markets fund managers will tend to maintain broad networks in the countries in which they invest, including central banks, political and educational experts, so they can identify problems before they start. 

This is certainly a higher risk asset class, but it brings something new and diversifying to a portfolio. Investors get to back the growth of some of the world’s smallest economies, helping them develop their potential. These are arguably the true emerging markets. 

*Source: Vietnam Briefing, 11 November 2025

**Source: Money and Me podcast, 23 July 2025

***Source: Cambridge Associates, Frontier Markets, 2019

****Source: index factsheet, 31 October 2025

^Source: fund factsheet, 30 September 2025