It is fairly well accepted that the term “frontier markets” was first used when Standard and Poor’s began to track a frontier market index back in 1996. But the phrase/concept gained wider viability in October 2007 when S&P actually launched the first investable index, the Select Frontier Index, which features 30 of the largest companies from 9 countries, per the breakdown pictured above, as well as the Extended Frontier Index, listing 150 companies from 27 countries. Soon after, MSCI Barra launched its own frontier market index (see chart below), which follows 19 countries. And back in March, Merrill Lynch Global Research rolled out its own Frontier Index, covering 50 of the largest and most-traded companies from 17 countries in Asia, Africa, Europe and the Middle East.

The index includes companies from countries like Nigeria, Cyprus, Kazakhstan, United Arab Emirates and Morocco. Stocks eligible for inclusion have a minimum market capitalization of $500 million, a minimum three-month average daily turnover of $750,000, and also a foreign ownership limit of more than 15%. The three most important sectors in the Merrill Lynch Frontier Index provide some insight as to what is driving the development and growth of frontier markets. Banks are the largest sector at nearly 40% of the index, while financial services companies are the next-largest at roughly 26% of the index. Oil and gas firms are 13.6% of the index.

What initially spurred frontier fever? S&P analysts analysts noted that frontier market economies were growing at a “brisk pace since 2000”. Per the shown graph (right), since 2000 the average real gross domestic product (GDP) growth in frontier markets increased at an annualized rate of 5.6%, outpacing the growth of both emerging and developed markets. However, in one sense the high growth rates may only underscore how poor these markets truly were (and to a large extent still are), rather than any marked, long term improvement or liberalization in their market conditions per se (the GDP per capita of much of the developed world is roughly $37,500, compared with just $1,845 for frontier markets and $2,390 for emerging markets, for example).

Finally, in 2005 a paper published at Goldman Sachs went one step further, breaking the frontier market down into the countries most likely to follow in the path of the mighty BRIC economies. Their top candidates, which they dubbed “the Next 11” (see chart below), include Egypt, Pakistan, Vietnam, Turkey and Iran.