I’ve written before about how a boom in emerging market stocks is not a question of “if” but “when.” Catch a boom in an emerging market — India is a solid candidate for 2014 — and you can easily double or triple the returns you get from just sticking with mainstream U.S. stocks.
There is, however, a way to boost your returns even more by investing in so-called “frontier markets” — developing markets that are even smaller and more illiquid than their emerging market cousins.
Surprisingly, frontier markets may also offer the better long-term investment opportunity.
Certainly, it has been that way over the past few years.
Yesterday, the MSCI Frontier Index closed at a record high, and it is up 18.22% in 2014.
That has far outpaced the MSCI Emerging Markets Index’s return of 9.07%, as well as the S&P 500’s return of 7.98%.
This strong performance continues a recent trend. The MSCI Frontier 100 Index was up 25.9% in 2013, outperforming the MSCI Emerging Markets Index by 28.5%.
Frontier Markets vs. Emerging Markets
Frontier Markets: The Investment Case
Strong economic growth, diversification and superior returns with lower volatility combine to make frontier markets a very attractive investment.
Invest in a successful market at the start of its emergence — as investing legend John Templeton did with both Japan and Germany after the Second World War — and you have the formula to generate big and lasting returns for many years to come.
High Economic Growth
Even as the pace of development in large emerging markets like China and Brazil slows, frontier markets are just now entering a period of mid- to high-single-digit percentage economic growth.
This process is driven by the same factors that lifted economic growth in emerging markets: favorable demographics, massive infrastructure spending and a shift in economic policies that signals to the world that a country is now “open for business.”
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.
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