Investors Look to MENA's 'Frontier' Markets: The Prospects for 'Frontier Markets' Are among the Best in the World, Analysts Say, and Look Set to Rival More Established Emerging Markets

By Smith, Pamela Ann | The Middle East, October 2010 | Go to article overview

Investors Look to MENA's 'Frontier' Markets: The Prospects for 'Frontier Markets' Are among the Best in the World, Analysts Say, and Look Set to Rival More Established Emerging Markets


Smith, Pamela Ann, The Middle East


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FUND MANAGERS IN THE US, EUROPE and Asia are growing increasingly excited about the new-found opportunities awaiting in the equity and bond markets of Saudi Arabia, Qatar and the other GCC countries, Jordan, Lebanon and Tunisia. These Arab economies, which are formally classified as "frontier markets", look set to rival their larger brothers in the more established "emerging markets", which include such attractive outlets as China, India, Brazil and Russia, as well as Egypt, Morocco and Turkey. While some corrections can be expected as the global economic recovery falters, their medium- and long-term prospects remain among the best in the world, analysts say.

Frontier markets, which are too small and underdeveloped to be included in the major international stock indices, are back in fashion with foreign investors, notes a report from Credit Suisse, the Swiss investment bank. They are "tomorrow's emerging markets". The countries involved have become increasingly business-friendly, the bank confirms, while deregulation and the privatisation of state industries have helped to increase the size of their stock markets.

A younger generation that is rapidly expanding and which is affluent enough to buy consumer goods, international brands, housing, educational and health services is another positive factor. So too are the billions of dollars which governments in the Middle East and North Africa (MENA) are spending on infrastructure. But perhaps most importantly, analysts, brokers and investors are enthusiastic about them because they have generally offered better returns this year than either emerging markets (EMs) or markets in the developed economies.

EPFR Global, which tracks the flow of money into stock and bond funds around the world, reported this summer that inflows into frontier funds were at record levels. "By being early, as these markets develop, investors can take advantage of that, because the deeper and more transparent a market, the higher the valuations they can command," observes Ghadir Abu Leil-Cooper, who manages a fund for the Middle East and North Africa (MENA) launched by the UK-based Barings group in March. Investors, she adds, are expecting these markets to become more institutionalised and more open.

Governments, investors and businesses in MENA's frontier markets hope such moves will help to boost the chances of their markets reclassifying and becoming part of the more mainstream emerging market indices, thereby leading to yet more foreign investment. But, from a foreign investor's point of view, as their levels of liquidity and risk match up more to those of the EMs, their returns might lessen due to the lower level of volatility.

Emerging markets

The participation of institutional investors in particular, such as pension funds, sovereign wealth funds, hedge funds and private equity "will improve liquidity and reduce volatility", confirms Yazan Abdeen, manager of the ING Invest Mena fund, set up by the Dutch financial group, ING. "This will help the markets reclassify as emerging markets."

Saudi Arabia and Qatar, are "often ignored", commented Sam Vecht, co-manager of the Global Emerging Markets fund set up by one of the world's largest asset managers, BlackRock of the US. "This is because of a lack of analyst and media coverage, rather than a lack of opportunities."

London's influential Daily Telegraph, in a feature in August on new investment opportunities, called frontier markets "the BRICs of the future", a reference to the term invented by Jim O'Neill of Goldman Sachs to refer to Brazil, Russia, India and China. They have "burgeoning industry and a population with a thirst to better themselves through education and Western-style material acquisitions."

Frontier markets, which are often described in financial circles simply as "FMs", are countries which have a lower market capitalisation and less liquidity than emerging markets (EMs). …

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