In frontier markets, investors searching for the next big growth story have an opportunity to enter a market at the beginning of its cycle.
Many investors are seeking an alternative to emerging markets, and their less developed counterparts could see stock market growth of around 11 per cent per annum for the next 10 years.
Performance over 1-yr
Source: Financial Express Analytics
Frontier markets benefit from having relatively low stock penetration to overall GDP, allowing room for growth plus strong demographic profiles and economic prospects.
They also offer diversification from developed and emerging countries, and many continued to grow during the financial crisis.
To invest in these markets a high level of indepth knowledge is required and the investment approach depends on various factors, including demographics, governance and availability of economic information.
Due to the less developed nature of these markets they can be difficult to access, making skilled stock-selection key. Attractive opportunities can be found in Nigeria, Kazakhstan and Mongolia. In Nigeria, for example, the demographics are very favourable.
There are 150 million people and the average age is 19, which creates a huge potential workforce for the consumer and infrastructure sectors. Favoured stocks include Nestle Nigeria, Guinness Nigeria, Ashaka Cement and Nigerian Breweries.
Kazakhstan and Mongolia are significant commodity producers and have the benefit of low production costs. Another advantage is their proximity to China and India, which have high demand for resources.
Kazakhstan has 3.2 per cent of global oil reserves (the ninth largest in the world), is the number one producer of uranium and also has significant coal reserves.
Eastern Europe’s frontier markets are also interesting. However, the region has experienced dramatic austerity measures, so countries such as Estonia are on our watch list for the second half of 2011.
In an attempt to reduce its public sector deficit, Estonia's government reduced public sector salaries by between 30 and 40 per cent in 2009, which translated to lower growth from 2009 to 2010.
The measures are now beginning to make an impact on the economy and we expect the country to achieve positive growth later this year.
Frontier markets have huge potential, but, in order to improve liquidity and lower volatility, investors should mix investments in frontier markets with less developed emerging markets. For example, a fund combining Russia and Turkey with Kazakhstan, Ukraine and Mongolia can provide daily liquidity for investors.
Andrzej Blachut, head of emerging market equities, Swiss & Global Asset Management. The views expressed here are his own.