The Strategic Case for Frontier Emerging Markets Equity in a Shifting Global Economy

In an era of geopolitical fragmentation and technological disruption, frontier emerging markets (FEMs) are emerging as critical arenas for long-term capital growth. These markets, often overlooked for their volatility and complexity, offer unique opportunities for investors willing to adopt an active, bottom-up approach. Harding Loevner’s Q2 2025 report underscores this thesis, demonstrating how strategic allocation to FEMs can yield resilience and diversification benefits amid a shifting global economy.

Active Management: Navigating Idiosyncratic Risks and Opportunities

Harding Loevner’s Frontier Emerging Markets Equity strategy, managed by Sergey Dubin and Babatunde Ojo, emphasizes a quality-growth philosophy tailored to the idiosyncratic nature of frontier markets [1]. This approach is particularly relevant in regions like Egypt and Nigeria, where currency liquidity crises have destabilized passive strategies. For instance, BlackRock’s decision to liquidate its Frontier & Select EM ETF highlights the risks of rigid, index-driven allocations in volatile environments [3]. In contrast, Harding Loevner’s active management prioritizes fundamental research to identify undervalued, well-managed companies with durable competitive advantages, even in turbulent markets [4].

The Q2 2025 report illustrates this strategy in action. Despite a 8.2% return (gross of fees), which underperformed the MSCI Frontier Emerging Markets Index’s 11% gain, the fund’s focus on sectors like industrial gases and non-U.S. semiconductor manufacturers positioned it to capitalize on long-term structural trends such as AI and cloud computing [1]. By prioritizing companies with scalable business models—such as Vietnamese IT services firm FPT Corp or Bangladeshi pharmaceuticals players—Harding Loevner mitigates short-term volatility while aligning with global technological shifts [5].

Diversification and Untapped Potential: The Case of the DRC and Southeast Asia

Underappreciated markets like the Democratic Republic of the Congo (DRC) and Southeast Asia exemplify the growth potential embedded in FEMs. The DRC, rich in cobalt and copper, is poised to become a cornerstone of the global renewable energy transition. Harding Loevner’s interest in DRC tin producers reflects its ability to identify resource-driven opportunities in politically complex environments [5]. Similarly, Southeast Asia’s economic reforms and demographic dividend—evidenced by Vietnam’s evolving stock market—offer fertile ground for active managers to exploit mispricings [3].

The MSCI FEM Index’s diversification further amplifies these opportunities. Unlike the concentrated MSCI EM Index, the FEM Index now includes 10 smaller markets, with the five largest (Philippines, Vietnam, Peru, Romania, Morocco) accounting for less than two-thirds of its weight [3]. This dispersion reduces systemic risk while enabling managers to target niche sectors, such as Morocco’s solar energy infrastructure or Peru’s agricultural innovation.

Long-Term Resilience: Beyond Quarterly Performance

While Harding Loevner’s Q2 2025 results lagged its benchmark, long-term value creation remains its core strength. The firm’s research on value and momentum effects in FEMs—demonstrating their independence from global risk factors—highlights the sustainability of its strategies [2]. For example, its focus on consumer defensive stocks (10.2% of assets in Q2 2025) contrasts with the index’s 4.3% allocation, reflecting a conviction in resilient demand patterns across emerging economies [1].

Critics may cite the fund’s 2013 underperformance (-1.1% annualized over five years), but recent adaptations—such as its emphasis on AI-driven sectors and regulatory risk mitigation in China—signal a recalibration toward long-term structural trends [3]. As Pradipta Chakrabortty, co-manager of the Emerging Markets Portfolio, notes, “Frontier markets require patience and a willingness to navigate regulatory and macroeconomic noise to unlock their true potential” [2].

Conclusion: A Strategic Imperative for Diversified Portfolios

The strategic case for frontier emerging markets equity rests on three pillars: active management’s ability to navigate volatility, the diversification benefits of underpenetrated markets, and the long-term growth potential of resource-rich and reform-driven economies. Harding Loevner’s Q2 2025 report, while not immune to short-term challenges, exemplifies how disciplined, bottom-up strategies can transform frontier markets from speculative bets into resilient, value-creating assets. For investors seeking to future-proof their portfolios, the message is clear: FEMs demand active engagement, but the rewards—measured in decades, not quarters—are substantial.

Source:
[1] Harding Loevner Q2 2025 Frontier Emerging Markets Portfolio Report
https://www.hardingloevner.com/ways-to-invest/us-mutual-funds/frontier-emerging-markets-portfolio/
[2] Harding Loevner: Frontier Markets Require an Active Look
https://www.hardingloevner.com/out-of-our-minds/frontier-markets-require-an-active-look/
[3] MSCI Frontier Emerging Markets Index Composition Analysis
https://www.morningstar.com/funds/xnas/hlfzx/analysis
[4] Harding Loevner Emerging Markets Equity Q2 2025 Report
https://seekingalpha.com/article/4820770-harding-loevner-frontier-emerging-markets-equity-q2-2025-report
[5] EM Fund Stock Picks & Country Commentaries (July 20, 2025)
https://emergingmarketskeptic.substack.com/p/em-fund-stock-picks-commentary-july-20-2025