Investors turn to frontier markets in Africa and the Persian Gulf as Brazil and China cool off

  • Article by: MATTHEW CRAFT , AP Business Writer
  • Updated: July 19, 2013 - 4:10 PM

NEW YORK — Bulgaria, the United Arab Emirates and Pakistan. An itinerary for a traveler with a flair for languages or a list of scenes for a spy thriller set during the Cold War?

Neither. It turns out they're among the countries with the best-performing stock markets in the world this year. And the success of these so-called frontier markets, mainly in Asia and Africa, has attracted U.S. investors eager to find the next set of rapidly growing countries now that Brazil and other emerging markets have fallen into a slump.

"These places might scare some people," says Russ Koesterich, global chief investment strategist at the money-management giant BlackRock. "But they're seeing some of the fastest growth in the world."

People had a similar response when investors were dabbling in emerging markets during the 1990s, Koesterich says. "Brazil and India — those used to be scary places, too."

Unlike the U.S. and Europe or even emerging markets like China and Brazil, frontier-market countries are a grab-bag group with little connection to each other. But they have a few things in common. They're small, growing quickly and some, like Kuwait and Qatar, are rich. Many of them shunned the outside world for years and are slowly opening their doors to outside investments.

Thanks to rapid economic growth, the MSCI Frontier Market index has gained 22 percent over the past 12 months. That compares with a 3 percent rise for MSCI's emerging market index, and 25 percent for the Standard & Poor's 500, the benchmark U.S. stock index.

Investing in frontier markets carries plenty of dangers. Argentina's government could decide to take over more private companies and leave investors with nothing. The war in Syria could spill into Lebanon and Jordan, upending their thriving markets. Cote d'Ivoire, Pakistan and many of the 37 frontier countries have had coups, wars and other turmoil over the past two decades.

"Buying into them has to be a long-term play," says Jack Ablin, chief investment officer at BMO Private Bank. "You have to take some leaps of faith."

The steady rise of their stock markets has apparently helped investors put aside their worries. They've dropped money into frontier market funds week after week, raising the total to $3 billion so far this year, according to EPFR Global, a company which tracks the flow of investment funds. That's triple the amount deposited in them last year and just shy of the full-year record of $3.07 billion in 2010.

Cash has streamed in so quickly that Franklin Templeton's $1.3 billion frontier fund has decided to start turning away new investors. Its top holdings include a Romanian oil and gas producer, OMV Petrom, and a batch of companies from Qatar and other countries on the Persian Gulf.

Last month, Wells Fargo's private banking group, which manages $170 billion in clients' money, took its first step into the frontier, pulling a portion of its money out of emerging-markets like Brazil, China and India and putting it into countries like Pakistan and Vietnam.

A key reason for the move was that the frontier markets are largely insulated from problems plaguing bigger countries, said Sean Lynch, the global investment strategist for Wells Fargo Private Bank.

When stock and bond markets in the U.S. and Europe were rattled by talk that the Federal Reserve would withdraw some of its support for the U.S. economy, many countries' currencies sank against the dollar. But Lynch noticed that frontier countries' currencies held up.

Why? As a group, these less-developed countries aren't as tied to the world's developed economies. Their industries are growing by selling to customers at home or nearby. Kenya's East African Breweries Ltd., for example, has most of its customers in neighboring African countries.

"They really seem impervious to what's happening on the main stage," says Ablin.

The main attraction for investors is the rapid economic growth. In theory, it should pull many people in those countries out of poverty, and as they begin to spend their higher pay on refrigerators and mobile phones, local businesses should flourish.

"A lot of them have growing populations and expanding workforces, and they don't just rely on exports of food or oil," Lynch says. "Look at Vietnam. They traditionally exported coffee, seafood and rice. Now they're making high-end machinery."

Not so long ago, these same traits lured investors to emerging markets. But after more than a decade of strong economic growth, the upstarts have slowed. Brazil, Russia and India are now closely tied to swings in global markets as well as to each other.

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