Emerging and Frontier Markets Update March 2011

Emerging and Frontier Markets Update March 2011

Most investors looking to tap into booming emerging markets look to China and India, and it is easy to see why, India's main board alone is up 17.43% over last year in the first 2mths of 2011.

Other emerging markets which are yet to cross mainstream investors' radars could hold greater prospects. Relatively smaller emerging south-east Asian countries, such as Malaysia, Thailand, Indonesia and the Philippines, not only benefit from but are an integral part of the economic boom in the Asia-Pacific region.

Meanwhile, the Middle East and Africa (MENA) and Latin America are also increasingly attracting fund managers' attention. Often referred to as frontier markets or 'emerging emerging' regions, these economies are becoming interesting stories in their own right. They may not be as big as the BRIC [Brazil, Russia, India and China] nations but they have the economic growth and rising wealth associated with developing economies. As such they stand to benefit greatly from the continued demand for resources in which they are rich.

In the last six months of 2010, the MSCI Frontier Markets index outperformed emerging markets, gaining 16.5 per cent compared with 12.3 per cent.

From 2002 to 2010 the Frontier Markets index returned 9.2 per cent a year, outperforming global equities by more than 3 per cent.

This is why we at Alliance Emerging Markets look to these ‘Frontier Markets' to bolster our ‘Emerging Market' investments.

Here we provide a brief rundown of the Frontier Markets, region by region.

South-east Asia

The 10 members of the Association of Southeast Asian Nations (ASEAN) have a combined population of more than a half a billion people â€Â" twice as many as the US. However, they generate only one-tenth of the economic output of the States, reflecting a huge untapped potential for growth.

Many of the ASEAN markets have significant natural resources and produce highly-sought after   agricultural products such as wood, rubber, sugar cane, palm oil and rice.

Not only are they well-positioned geographically to supply the billion people-strong markets of China and India but in many cases they have competitive advantages over their larger neighbours, making them ideal export partners.

We believe that as the level of integration between Asia's economies increases, these markets are more and more independent of the fluctuations in economic cycles in the more developed economic regions, an investment in ASEAN markets is an ideal form of diversification for a global equities portfolio.

Currently Thailand and the Philippines are the most promising markets in the region. The Philippine stock market has risen 39.8 per cent in the past year for Sterling investors, while the Bangkok stock exchange has increased by 61.2 per cent.

In the Philippines, political risk is less acute than it once was. President Corazon Aquino is expected to push through more reforms designed to reduce corruption and improve public finances.

Coupled with a boom in domestic consumption, they should continue to support share prices. In Thailand, corporate earnings are rising quickly and are poised to grow at 10 t o20 per cent for the next few years. Thailand may be about to experience a burst of strong economic growth similar to the beginning of the 1990s, the only negative scenario for Thailand is only conceivable within the framework of an economic collapse in Asia, and there are no signs of that happening.

Middle East and Africa

The economies of the MENA region are expected to grow by more than five per cent this year, though individual economies, such as Qatar and Egypt, are poised to expand far faster. Qatar is primed for double-digit growth and is set to expand by 50 per cent by the end of 2012, according to the International Monetary Fund.

Qatar has great potential for growth in sectors such as financials and industrials and there are several large cap stocks yielding more than seven per cent. Following the successful World Cup bid, Qatar's infrastructure will undergo significant transformation in the next few years, providing a new wave of opportunity.

The outlook for economic growth in parts of Africa is also bright, with Nigeria, Kenya and Zimbabwe anticipating increases of four to eight per cent.

Latin America

Many Latin American countries have come through the credit crisis relatively unscathed, thanks to strengthened financial systems and prudent banking practices.

Countries such as Brazil, Chile and Mexico are characterised by young, urban populations with rising incomes and a growing middle class. By 2020, the Future 7 (Argentina, Mexico, Indonesia, Vietnam, Turkey, Egypt and South Africa) population will account for a tenth of global consumers and disposable income per capita will rise by 52 per cent. With expanding, young populations, this bodes well for retailers, banks and consumer-related companies.