Frontier Markets

Interpretation

The MSCI Frontier Market Indices encompass a collection of indices that track the stock market performance in frontier economies. A frontier market, as defined by MSCI, refers to a country with a nascent economy that is less advanced than those in emerging markets. These markets are characterized by their developing stages of industrialization, evolving infrastructures, smaller capital markets, and lower levels of income compared to emerging markets. Frontier markets offer potential for growth but are often marked by higher investment risks and lower liquidity compared to more developed markets.
MSCI country indices are designed to include about 85% of the free float-adjusted market capitalization in each country. This approach ensures that the indices provide a comprehensive representation of the large and mid-cap segments of the respective national equity markets. The country index versions in the charts above are all denominated in USD, capitalization-weighted, and do not include dividends.

Further Information

• Longermtrends: Emerging Markets
• Longermtrends: Developed Markets
• Longermtrends: Emerging vs. Developed Markets
• Longermtrends: (All) MSCI Country Indices

Interpretation

This heatmap shows the relationships between the stock markets of frontier economies. Red squares indicate a positive correlation (markets moving together), while blue shows a negative correlation. Frontier markets are often driven by local dynamics rather than global trends, resulting in very low correlations with each other and with developed markets, as the chart shows.

This low correlation makes frontier markets a powerful tool for diversification. For investors seeking truly uncorrelated assets to enhance portfolio stability, these markets can be a valuable addition. This is a clear example of Ray Dalio's "Holy Grail of Investing"—finding assets that move independently to reduce overall risk.

To create this chart, weekly returns are calculated for each country's MSCI index, and the Pearson correlation is computed for every pair. The heatmap is then organized using hierarchical clustering to group countries with the most similar market performance, helping to identify any underlying regional connections.

Interpretation

The Minimum Spanning Tree (MST) simplifies the correlation matrix by showing only the strongest connections between indices. If two indices are linked, they have a strong positive correlation and tend to move in tandem. This helps identify clusters of related assets and is useful for portfolio diversification.
The tree is constructed by converting the correlations into distances and then finding the set of connections that links all indices with the minimum total distance. As noted by Marti, Gautier, et al. (2017), the optimal Markowitz portfolio is often found at the tree's outskirts, and the tree tends to shrink during a financial crisis.

Data Sources

• Eastern Europe - Balkans
• MSCI Bosnia and Herzegovina*
• MSCI Bulgaria*
• MSCI Croatia
• MSCI Romania
• MSCI Serbia
• MSCI Slovenia
• Baltic and Eastern Europe
• MSCI Estonia
• MSCI Lithuania
• MSCI Ukraine*
• Middle East and North Africa
• MSCI Lebanon*
• MSCI Morocco
• MSCI Jordan
• MSCI Oman
• MSCI Bahrain
• MSCI Tunisia
• Sub-Saharan Africa
• MSCI Kenya
• MSCI Nigeria
• MSCI Senegal
• MSCI Zimbabwe*
• MSCI Mauritius
• South and Central Asia
• MSCI Bangladesh
• MSCI Kazakhstan
• MSCI Pakistan
• MSCI Sri Lanka
• MSCI Vietnam
• Latin America and the Caribbean
• MSCI Argentina*
• MSCI Jamaica*
• MSCI Trinidad and Tobago

*The country indices marked with an asterisk are classified by MSCI as "Standalone Indices" and are not part of the MSCI Frontier Markets Index. They represent individual markets with significant barriers to foreign investment, such as stringent capital controls and regulatory constraints.