Following a disappointing 2015, frontier markets returned to form and posted a solid annual gain in 2016. The asset class has returned robust performance over a five-year period and, combined with meaningful political and economic improvements, has brought much attention to what have been largely overlooked investment opportunities.

Economic growth across frontier markets was relatively sluggish during much of 2016 as concerns over high inflation and volatile commodity prices took root alongside some country-specific issues. However, indicators turned up sharply in the final months of the year, and with exchange rates looking a lot more competitive, there is enough encouraging news flow to retain a positive outlook for both the near and longer term. Additionally, in the wake of an unexpected U.S. election result, bringing with it potential changes to world trade, the low correlation of frontier markets with their emerging and developed counterparts acts as welcome insulation to ensuing global market uncertainty.

In terms of individual economies, in Argentina, President Mauricio Macri has successfully renewed investors' interest, attracting record levels of foreign direct investment (FDI) this year. But while his administration has momentum, lowering inflation has to be addressed while still keeping a promise to tackle the country's fiscal deficit. Ideally there needs to be some progress in these issues before next year's midterm elections.

In Africa, Nigeria faces a mix of challenges, including a dysfunctional exchange rate and high inflation. It is also entering its first official recession in over 20 years. However, we also question whether this indicates that the market is near a bottom, which would create a significant buying opportunity as valuations look increasingly cheap.

Growth prospects across frontier Asia including Vietnam, Sri Lanka, and Bangladesh remain intact given consistently healthy macroeconomic backdrops and relatively low fiscal imbalances. Vietnam is steadily growing exports to levels consistent with many developed economies while a young, highly productive middle class continues to emerge. Meanwhile, the Romanian economy is showing signs of a cyclical upswing, underpinned by solid domestic demand, which has risen as a result of higher wages, low interest rates, and value added tax cuts.

Acting as further proof of the rapid growth achievable by these countries is Pakistan's proposed reclassification to emerging markets status by MSCI (set to take effect in 2017). This follows MSCI's upgrade of Qatar and the UAE to the emerging markets universe. We believe that other frontier countries have the potential to also become emerging markets over the longer term.

Therefore, we believe frontier markets have a place, albeit a small one due to the heightened risks, in an investor's global portfolio. The macro fundamentals and demographics in many frontier markets are favorable today and, in some cases, resemble those of emerging countries approximately 15 to 20 years ago. For example, GDP growth for many frontier markets is likely to range from about 6% to 9% in the years ahead, much stronger than in the developed and emerging markets. Also, nearly 60% of the aggregate population in the frontier universe is below the age of 30; a young workforce that should drive economic growth and develop into a solid middle class of consumers. Of course, conditions and investment opportunities will vary widely among individual frontier countries, even within the same region. While stock valuations are still reasonable and the long-term growth outlook of many corporations remains underpriced, we acknowledge that there will be individual winners and losers.