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Frontier markets – looking past the headlines

Frontier markets – looking past the headlines

By: Mat Lystra, Sr. Research Analyst

When we think about frontier markets as investment options, concerns like corruption, rule of law (or lack thereof) and inaccessible government services might come to mind. These are the types of risks that make for catchy news headlines but they shouldn’t necessarily be showstoppers when considering this segment of the market. To get the whole picture, one needs to consider the factors outside of the headlines that drive performance. 

As an example, I recently took notice of a story by The Global Post, which reported that a person living in a Kenyan city pays an average of 16 bribes per month in order to get on with daily life.[1] Such costs are largely unthinkable for those of us living in well-established developed markets. This prompted me to look at some of the countries commonly classified as “frontier markets” to determine if this headline risk was aligned with the historical returns in these markets. Kenya is currently classified by FTSE Russell as a frontier market.[2]  

As you can see in the chart below, despite having one of the lowest ratings among frontier markets as measured by Transparency International’s Corruption Index, Kenyan stocks—as measured by the FTSE Russell Frontier index—have been some of the highest performing over the last five years.[3] Kenya’s five-year annualized return of 14.87% is second only to Malta among this grouping of countries.[4]

Transparency International’s Corruption Index Score and Performance

Sources: Transparency International and FTSE Russell data as of March 31, 2016. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

Based on the data in the chart above, it seems that levels of corruption are not necessarily inversely related to poor returns for frontier markets.[5] A large part of a frontier market’s potential, particularly for a country such as Kenya, lies in how much room there is for improvement: imagine the additional buying power of the Kenyan consumer if paying bribes were to become a thing of the past. The headlines don’t tell the whole story.

Let’s take a broader look at how frontier markets fare versus developed and emerging markets as tracked by the Russell Frontier Index. We can see below that the Frontier Index performance falls squarely in the middle of the Russell Developed (ex US) and the Russell Emerging Markets Indexes for both the three and five year periods on an annualized basis. Most strikingly, it has done so with the least volatility of the three since the financial crisis in 2009. 

Comparative Annualized Performance and Volatility of Russell Indexes

Source:  FTSE Russell data as of March 31, 2016. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures.

As we can see above, frontier markets offer a different risk/return profile than their developed and emerging market counterparts. This makes sense because as a group frontier markets combine characteristics of the other two categories in that they can be as diverse as emerging markets, with some as economically and politically free as many developed markets. So, if we can look past the headlines we can identify other factors that drive performance in these regions or countries, which can inform investment analysis, diversification and decisions.

Please see the FTSE Russell website to learn more about the Frontier Index series.


[1] Fannin, Z. & Schifrin, N. (2016). The average city dweller in Kenya pays 16 bribes a month. Global Post, accessed on May 27, 2016 at:

[2] For more information about FTSE’s country classifications please visit:

[3] For more information about Transparency International’s Corruption Index please visit:

[4] Country returns from the Russell Frontier Index.



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