"With over-leverage still a major global issue, commodity-rich frontier economies like Qatar look well placed and we see scope for frontier market funds to outperform in 2012," said a recent note from investment trust analyst Oriel Securities.
Slim Feriani, managing director at Advance Emerging Capital, launched the Advance Frontier Markets trust nearly five years ago and says the sector has among the strongest economic fundamentals in the world, including the lowest debt to GDP and the highest foreign exchange reserves to GDP ratios.
"They have been and will continue to be among the fastest-growing economies because they’re starting off from a low base and are benefitting from their demographic dividend," he explained.
"Their equity markets are trading at or near all-time lows in terms of valuations and the ongoing structural change there is mind boggling."
"Yet foreign investors are barely taking note. This perception vs reality gap offers a huge opportunity in itself. We believe frontier markets are likely to be the best-performing asset class over the next five-to-10."
Performance of trust vs sector over 1-yr
Source: FE Analytics
Our data shows the Advance Frontier Markets trust has lagged its IT Global Emerging Markets sector since launch and took a hit last year following the Arab uprisings.
Templeton’s Mark Mobius says that the fundamental changes brought about by last year’s revolutions have created compelling investment opportunities.
"In the short-term of course it won’t be an easy road and we can expect turmoil, but over the long-term it is a very positive development because the move towards more open societies in the region creates an excellent environment for economic freedom and capital market development."
"You can never miss the boat if you buy when things are most negative, when people are the most concerned about the political viability of a country or region. We were investing before the Arab Spring and we continue to invest."
The managers also point out that frontier markets are decoupled from developed regions, which will help portfolios if there is another global recession.
"In 2008/9 we saw that, as a result of carrying lower debt burdens, some frontier governments were able to use countercyclical fiscal policies to protect their countries from the worst vagaries of the financial crisis in a way that was not available to more indebted, more developed nations," BlackRock Frontiers manager Sam Vecht said.
"Within frontier markets, we do see countries that will benefit from a limited slowdown in other emerging economies. In this regard we would highlight those countries which are currently struggling with high inflation due to high commodity prices. In the event of an emerging market slowdown, demand would fall, lessening commodity-based inflation."
However, the Association of Investment Companies’ Annabel Brodie-Smith recommends investors only use frontier markets as a diversification tool.
"The Global Emerging Markets sector is a diverse sector, with some companies focusing on frontier markets, whilst others take a broader emerging markets approach where exposure to frontier markets may be relatively low. Investors need to do their homework and if necessary, seek financial advice," she cautioned.