Why Frontier markets have such a big role to play in global trends

There are powerful changes happening in the global economy. Mounting geopolitical tensions bring risks for companies. The threat of higher tariffs, and – at the extremes – sanctions, could create potential disruption to companies’ supply chains and distribution networks. To that effort, many companies have been reorganising their supply chains to adjust to this new reality. We believe a number of the world’s smaller emerging markets could be beneficiaries.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The disruption of the pandemic, trade wars and military conflict have forced companies to look again at how and where they source materials. This is particularly acute in areas such as the raw materials needed for the energy transition, where a lot of countries are competing for the same resources¹.

Supply chains are being re-routed, and trading relationships redrawn. Data from McKinsey shows that companies are increasingly moving from a ‘just-in-time’ model to a ‘just-in-case’ model. This means looking to prioritise stability and reliability, over speed and efficiency². Part of this phenomenon is ‘near-shoring’, bringing manufacturing closer to home. McKinsey says the number of companies taking action to bring production closer to home has doubled over the past 12 months³.

Large trading nations look to emerging markets

As geopolitical tensions rise, we believe that neutral countries could stand to benefit. In this context, ‘neutral’ means being neither part of the Western bloc led by the US, or the Eastern bloc led by China and Russia. Increasingly, larger trading nations are looking to the cheap, skilled labour forces and abundant natural resources of the world’s smaller economies as a less complex and more reliable way to source the products and services they need⁴. We believe this can create opportunities across a number of frontier markets.

For instance, Apple, which previously concentrated much of its manufacturing in China, is now diversifying its operations to include other locations such as Vietnam. Apple has already spent almost $16 billion in the country through its supply chain since 2019⁵, creating more than 200,000 jobs. Similar trends are also observed in Thailand, Malaysia and Indonesia⁶.

This trend also extends to the sourcing of raw materials. The energy transition happening across the globe as countries move to low carbon fuels is resource-intensive. Western nations in particular, may prefer to trade more with countries that have taken a neutral political stance in response to increasing geopolitical tension. This has helped demand for copper from Chile, nickel from Indonesia, metals from Kazakhstan.

How emerging markets are benefiting from shifting trading patterns

Why do these shifting trading patterns matter for smaller emerging markets? They are a powerful means to change a country’s economic fortunes, we believe. International companies setting up manufacturing plants create jobs, which puts money in people’s pockets, which supports the growth of a consumer economy. This is where investment opportunities can start to flourish.

These frontier markets is also where we focus our attention. The top holdings in the BlackRock Frontiers portfolio include a bank in Indonesia, an information technology service company in Vietnam, an online marketplace in Kazakhstan and a mobile company in Saudi Arabia⁷.

These opportunities are often interconnected. Banks play a crucial role in economic development, especially as financial inclusion expands and the demand for business funding increases. The growth of online commerce is closely linked to the spread of mobile telephony, while technology services are essential to support digitization. Together, these factors can drive long-term capital growth for our investors.

In this way, a small initiative—such as an international company establishing operations in an emerging market—can have a transformative impact. It can stimulate self-sustaining domestic growth and create new investment opportunities. It is this capacity for change that makes frontier markets such an exciting place to invest.

¹ Deloitte - Global trade and the new geoeconomic reality - 15 May 2024
² IMD - Why supply chain reorganisation now tops the CEO’s agenda - 25 April 2024
³ McKinsey - Tech and regionalization bolster supply chains, but complacency looms - 3 November 2023
⁴ Economist Impact - The Role of Neutral Countries in Global Trade - June 2024
⁵ CNN - ‘Perfect landing spot.’ Apple plans to spend more in Vietnam as it looks beyond China - 18 April 2024
⁶ The Star - Opportunities and challenges of China Plus One - 15 April 2024
⁷ BlackRock - BRFI factsheet - 30 June 2024

Risk Warnings

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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time and depend on personal individual circumstances.

Trust Specific Risks

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.

Emerging Markets: Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.

Frontier Markets: Frontier markets are generally more sensitive to economic and political conditions than developed and emerging markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund. There may be larger fluctuations to the value of your investment and increased risk of losing your capital.

Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.