What are the main strengths and weaknesses of investing into frontier markets?
The most important strength of investing in a frontier market is the potential for large returns on one's investment. Frontier markets have not yet developed and matured. There is still a great deal of demand that is not yet filled. This means that firms that enter the market can grow rapidly.
On the other hand, however, these markets can be much more risky for investors. These markets may not have established legal protections for investors. It is possible that governments will intrude and destroy the value of an investment. Because these markets are still developing, they are much more unstable than settled markets.
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Frontier markets are supposed to be markets that have low market capitalization, as compared to the real value of the stock, due to low turnover or other market restrictions, but where the market capitalization is expected to rise in future because of loosening of market restrictions, and development levels are expected to improve.
The main advantage of investing is the possibility of making large profits in view of low market capitalization. However, it is important to note that the need to select the right stocks to invest in as important in frontier markets as in any other type of market. The biggest disadvantage of investing in frontier markets is that it requires long term investment.