NEW YORK, April 15, 2013 /PRNewswire/ -- While it may be tempting to think China, India, and other major developing economies are the best way for equity investors to play the spread of globalization, S&P Capital IQ Equity Research says this narrow approach risks excluding the next generation of up and coming nations just as growth is starting to slow in the largest emerging markets.
In a recent report entitled "The Final Frontier," S&P Capital IQ Global Equity Strategist Alec Young writes that frontier markets and smaller emerging markets are less integrated into the global economy and therefore their growth is less driven by developed economies than larger emerging markets. As such, he argues they offer more exposure to coveted, domestically driven, secular consumer and infrastructure growth with significantly less correlation and volatility than larger emerging markets. "Despite boasting a strong ten-year track record, BRIC equities have underperformed frontier stocks since 2010 while also lagging smaller emerging markets like Mexico, Columbia, Peru, Turkey, and Indonesia, among others," according to Mr. Young. "Without a dedicated allocation to frontier markets, investors get no exposure to the asset class at a time when improving fundamentals and performance are increasing the opportunity cost of a lack of exposure."
Young says the nascent nature of these markets means market access, liquidity, and transparency remain relatively limited, creating market inefficiencies and posing greater risk than more developed markets. "On the other hand, these characteristics may present diligent and nimble active managers the opportunity to generate significant alpha, in our view. As a result, in addition to passive strategies that keep costs down, we also recommend including active management when investing in frontier markets," concluded Mr. Young.