Frontier markets: Where the returns are

Frontier markets: Where the returns are

Frontier markets: Where the returns are

A lot has been said about emerging markets like Brazil, Russia, India and China over the last decade. But the bloom has come off that rose a bit: Brazil is lagging, Russia is at war in Ukraine, China may be on the verge of a credit-bust. Apparently, it is time to move further afield. 

The term “frontier market describes a subset of emerging markets that are smaller and less-liquid like Argentina, Bangladesh, Nigeria, Slovenia, and Vietnam. Investing in these risky economies may be tricky. But the returns have been impressive.  Over the past year frontier markets have outperformed stocks from Japan, Europe, and the U.S. Shares of the MSCI Frontier 100 ETF gained 23% over the past year, outperforming BRIC-invested funds. Year-to-date frontier markets are up 17% vs. 5.5% for the S&P 500.

Especially impressive has been the performance of Qatar’s stock market, up almost 50%, and UAE’s Dubai Index, which gained 115%.

In Africa the big performers are Kenya and Nigeria. This past April Nigerian GDP reached $510 billion a year South Africa as the continent’s largest economy. A recent report by Bank of America Merrill Lynch suggests stocks in both Nigeria and Kenya trade at relatively attractive price-to-earnings ratios. Nigerian listed companies’ can expect earnings growth in 2014 of 13.6% while Kenya’s companies’ earnings this year will grow 19%. Kenya’s middle class is growing. The government is about to float a $1.5 billion bond that will be one of the biggest bonds ever sold by an African country.

“We view Nigeria and Kenya as two of the most attractive frontier markets over the next five years. The macroeconomic and demographic drivers of both countries are extremely compelling,” said an investment fund manager invested in the region.