Frontier local currency debt is among the most overlooked corners of the global fixed income market, yet it offers a rare mix of diversification, yield, and - contrary to popular belief - relatively low volatility. Building on the familiar case for emerging market debt, frontier markets take investors a step further into smaller, less crowded economies that remain far off the radar of most global allocators. Few are better positioned for this challenge than Aktia’s Emerging Markets team, which has been managing the Aktia EM Frontier Bond+ strategy for nearly a decade.
Defining the Frontier
While frontier local currency debt has distinct characteristics, the boundary between “frontier” and broader emerging markets is anything but clear-cut. Many economies classified as frontier share similar features with the smaller or less liquid segments of emerging markets.
In practice, the “frontier” label typically applies to economies at earlier stages of development, characterized by lower GDP per capita, stronger demographics, and a lower degree of integration into the global economy.
“Pure frontiers often have lower debt-to-GDP, higher growth potential, more inflation volatility, and a healthier demographic pyramid,” according to Henrik Paldynski, Head of Aktia’s Emerging Markets Team and Portfolio Manager. Inflation dynamics, for example, can be heavily influenced by domestic factors such as harvest outcomes, which can sometimes result in greater volatility in consumer prices. These features underpin the asset class’s appeal: higher growth prospects, low correlation with other asset classes, and, perhaps counterintuitively, often lower volatility.
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