Emerging market local currency bonds: investing in frontier markets

For many investors, frontier markets remain relatively unexplored. They offer an additional opportunity set to informed investors, but investing in these smaller, less efficient markets also involves a number of unique challenges and risks. In this paper, we discuss how to define frontier local currency markets, why they could make an attractive investment and how best to invest in them.

Defining frontier markets: Frontier markets are generally emerging market (EM) economies that are at the lower end of the development spectrum (as measured in per capita income) and have sub-investment-grade credit ratings. They generally have weaker infrastructure and score low in various social metrics such as life expectancy and literacy. These countries are yet to embark on a sustainable reform process to strengthen institutions and help drive economic growth further. Some are ‘fallen angels’ – markets that were part of the main EM universe, but have lost their core EM status because of economic crises, typically resulting from short-term or populist economic policies.