Lately, international investing, particularly emerging market investing, has been pretty poor. It’s hard to believe that, only two years ago, investors poured more than $16 billion into various emerging market mutual funds and exchange products. But then, the global slowdown came and growth, as well as stocks, have plummeted.

While the recent market rallies have brought some of these assets back, the iShares MSCI Emerging Markets Index ETF (NYSE:EEM), the major proxy for these markets, is still well off of its highs. This has led to the questioning of the theory of decoupling. Emerging markets, at one time, offered low correlation to the developed world. However, as these nations grew in prosperity, their fortunes became inter-twined with global economy. For example, China is now the United States’ second largest trading partner, contributing $387 billion worth of trade. China will continue to grow and prosper over the upcoming decades, and long-term investors should plan according in their portfolios. The real question is, where the next “Chinas” are, and is there a way to participate in their growth? 

Finding the Next China
Wall Street calls these emerging markets that have not fully emerged, “frontier economies.” They include such nations as Peru, Nigeria, Croatia and Kazakhstan. Typically, these frontier environments are characterized by very fast growing economies combined with very small or hardly-existent equity markets. For example, at the Ugandan Securities Exchange, the average daily volume in terms of dollars is only around $200,000. Add this to the often unstable political environments, and you have reason why these aren’t tourist hot spots.

But there are many positives to these frontier markets – many are rich in natural resources. As the long term global demand for oil, natural gas, gold and other commodities continues to increase, the prospects for growth in these nations is promising. In addition, frontier markets provide the low correlations that places like China and India used to provide. Comparing the three major international indexes, The MSCI World Developed, MSCI Emerging and S&P Frontier, to the S&P 500, we see that correlations are as follows, 0.95, 0.69 and 0.20, respectfully. (For more, see Go International With Foreign Index Funds.)

Full Story:  http://community.investopedia.com/news/IA/2009/The-Frontier-Awaits-FRN-PMNA-EEM0525.aspx

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