For investors, frontier markets can be seen as distant, volatile and difficult to access. Yet over the past decade they have delivered strong returns, while exhibiting lower overall volatility compared to both emerging and developed markets. At the same time, valuations remain close to historical lows, with forward P/E multiples for our holdings at just 6.7x, offering wide discounts to both emerging and developed markets.
After recent visits to Egypt, Vietnam and Sri Lanka, this is our extended postcard from frontier markets, what we are seeing on the ground, and why we expect the strong momentum to continue this year as well.
The three structural arguments for frontier markets
1. Higher structural growth
Frontier and smaller emerging markets are expected to grow by around 4.5% annually on average in the coming years, compared with roughly 3% for major emerging markets and around 1 to 1.5% for developed markets. These economies still stand to benefit from: growing populations and favourable demographics, rising financial inclusion, low penetration of modern retail, banking and broadband.
2. Lower volatility than perceived
Although individual frontier markets can be volatile, a diversified portfolio of frontier equities has historically shown lower annualised volatility than emerging markets in 10 out of the last 10 years and lower than developed markets in 9 out of the last 10 years. Low correlations between countries are key. What drives Vietnam is not what drives Kenya or Romania. The result is diversification benefits that are often underestimated.
3. Deep valuation discount
Despite strong recent performance, forward P/E multiples remain around 6.5x, near historical lows. Discounts to developed markets are around 50%, and to broader emerging markets around 20%.
Investors are being offered structural growth at a material discount.
Egypt - stabilisation turning into expansion
Egypt illustrates how quickly sentiment can shift.
Two years ago, the country faced severe macro imbalances. Since then:
- The currency has been devalued, shifted toward a flexible exchange rate and subsequently stabilised
- An IMF programme has been implemented
- Inflation has fallen sharply from above 30% to low double digits
- Rate cuts have begun
On the ground in Cairo, companies are moving from survival mode to expansion. Banks in particular are benefiting from improving liquidity and renewed credit demand. Financial inclusion remains low, leaving room for structural growth.
Egypt feels like a textbook early-cycle recovery, with macro repair first and earnings acceleration next. The companies we invest in are indeed already up by more than 30% so far this year.
Vietnam - convergence in motion
Vietnam remains the largest frontier market and one of the most dynamic economies globally.
GDP growth reached an impressive 8% in 2025 and policymakers are targeting an even stronger 10% growth this year. Ambitious infrastructure plans, including high speed rail and vast urban developments, underline this determination.
There is also a technical catalyst: expected confirmation of an upgrade to emerging market status by FTSE, which we think will unlock additional capital inflows.
But the most compelling story is structural convergence.
Modern food retail penetration remains well below regional peers, creating long-run opportunities for organised chains. Financial penetration is still developing, supporting banks. Broadband rollout and digital services continue to expand.
Vietnam is not just growing fast, it is upgrading its economic structure, climbing the value chain and investing heavily in connectivity and productivity.
Sri Lanka - reform after crisis
Sri Lanka experienced one of the most severe crises in the frontier universe. The country effectively ran out of foreign currency, defaulted and required IMF support.
Today the narrative is different.
Under the IMF framework, reforms are progressing and macro stability has improved. Inflation has come down, rate cuts are filtering through, and corporate sentiment is gradually improving.
Liquidity in some high growth companies remains limited, but the direction of travel is clear. Sri Lanka represents a classic post-crisis reform story - painful adjustment followed by the potential for sustained recovery.
Elsewhere in frontier markets: Bangladesh and Pakistan - reform momentum building
Across South Asia more broadly, reform is a common theme.
In Bangladesh, a political transition has resulted in a market-friendly outcome and renewed reform momentum. After years of distortions in market structure, the equity market is gradually normalising. Select blue chips and financials could benefit from improved visibility.
Pakistan has also progressed under its IMF programme. Inflation has eased, rate cuts are supporting domestic demand and select companies are seeing strong earnings momentum.
In both cases, the pattern is familiar: crisis, adjustment, stabilisation, then recovery.
Why now for frontier markets?
The structural case for frontier markets has been clear for years. What makes this moment different is the timing.
In several key markets, the adjustment phase is largely behind us. Devaluations have taken place, IMF programmes are advancing, inflation is falling and central banks are cutting rates. On the ground, companies are moving from stabilisation to expansion.
Portfolio companies are delivering around 15% average earnings growth, yet valuations remain at 6.7x forward P/E. Improving fundamentals combined with compressed multiples create compelling asymmetry. A more supportive global backdrop, stronger risk appetite and a softer dollar, adds to the case, while low correlations provide genuine diversification in an increasingly concentrated developed market universe.
The East Capital Global Frontier Markets strategy has reflected this shift with a strong start to the year, up nearly 15% year to date (in USD, net of fees), driven by disciplined stock selection across markets such as Egypt, Vietnam and Pakistan and supported by our high active share and focus on off index opportunities.
Frontier markets are not without risk. But today we see reform where there was turbulence, rate cuts where there was tightening and earnings growth where expectations remain subdued. For long-term investors willing to look beyond the headlines, this is often where the most powerful compounding begins - when stabilisation turns into expansion and valuations have yet to catch up.
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