Frontier markets were all the rage in the first half of 2008. Pre-Lehman Brothers' collapse, frontier markets -- particularly the Middle East and North Africa (Mena) region -- were shaping up to be the next big investment theme.

But that was then. Now, frontier markets have been exposed for the risk that many people were previously willing to overlook for the promise of investing early and reaping the potential rewards later.

A frontier market -- if we are to take the broadest possible definition -- is one where there is still no investment bandwagon to jump on. That's because the market is relatively small and illiquid, underdeveloped, and under researched. The more unknown it is to the great majority of investors worldwide, the more genuine is its frontier status. It could be said that the risks involved in investing in frontier markets were also what attracted investors to them in the first place.

There are no hard and fast rules about what makes a frontier market. Many investors use the relatively new frontier markets indices of Standard & Poor's and MSCI Barra as their benchmarks.

In August 2007, Standard & Poor's launched the S&P/IFCG Frontier Markets Extended 150 Index. Shortly after, in November 2007, MSCI Barra launched the MSCI Frontier Markets Index.

Both global index providers have Bahrain, Bulgaria, Croatia, Estonia, Kazakhstan, Kenya, Lebanon, Nigeria, Oman, Qatar, Romania, Slovenia, Sri Lanka, the United Arab Emirates, Ukraine, and Vietnam in their respective frontier market indices.

In addition to those markets, the S&P/IFCG Frontier Markets Extended 150 Index includes Bangladesh, Cambodia, Colombia, Cote d'Ivoire, Cyprus, Georgia, Jordan, Lithuania, Pakistan and Panama. The MSCI Frontier Markets Index, meanwhile, also lists Kuwait, Mauritius, and Tunisia.

In a recent global emerging markets strategy report, Merrill Lynch revisits this once promising investment theme and asks "what ever happened to frontier markets?"

Frontier markets were an outperforming, uncorrelated asset until the credit crunch went global with the bankruptcy of Lehman Brothers, but asset price correlations thereafter soared and vicious contagion caused an increasingly popular, secular growth theme to become a lonely and illiquid trade, notes Merrill Lynch.

The two catalysts that could end the frontier bear market, according to Merrill Lynch, are higher oil prices and an improvement in risk appetites. However, neither is immediately likely.

Oil breaking $58 per barrel, higher inflation expectations and a weaker US dollar would be catalysts for frontier markets to trade higher in the second quarter of 2009. If that scenario materialises, Merrill Lynch sees buying opportunities in Qatar utilities and well as Kazakhstan and Saudi energy.

"The secular argument for frontier (markets) has been wounded by global recession, but not fatally. The asset class remains undercapitalised and under-owned with strong growth potential," Merrill Lynch says in the report. "Emerging markets had 13 bear markets in the past 20 years, yet the asset class still grew from 1% to 10% of global market cap."