Saudi Arabia brings new opportunities

Qatar and the United Arab Emirates (UAE) currently account for roughly 33.74 per cent of the MSCI Frontier Markets index, with only Kuwait accounting for a higher share at 18.66 per cent.

But Ross Teverson, manager of the Standard Life Investments Global Emerging Markets Equity Unconstrained fund, suggests this is not necessarily a bad thing.

“The upgrade of Qatar and UAE makes a lot of sense. When we talk about frontier markets it is worth splitting them into two types of market, one would be classical developing economies and the other the high GDP per capita economies.”

He adds: “Clearly economies such as Qatar and UAE are very developed economies, particularly in terms of the level of GDP per capita. Given that when investors think about frontier markets they are often looking to get exposure to early-stage developing economies that have the potential to evolve into something that looks like the larger mainstream emerging markets, then I think it is helpful that some of these high GDP per capita economies are moving out.”

However, he acknowledges a challenge of getting frontier market exposure is the relatively small market capitalisation of the various markets within the index.

“If you were looking at the potential downside of the promotion of certain markets from frontier to emerging, one of the considerations is the reduced market capitalisation of the frontier markets.”

But, at the same time, the promotion of these markets illustrates one of the points of investing in frontiers – to find countries that will be upgraded and re-rated. This evolution also offers the chance for countries that aren’t even classified as frontier yet to garner more attention; countries such as Myanmar and Georgia.

Dominic Bokor-Ingram, co-portfolio adviser of Magna New Frontiers fund, notes: “I guess the most interesting current case is Myanmar where it has been a closed economy for quite a long time. It is a big country and they’ve just had the first IPO on the Myanmar stock exchange. That could potentially be a very big market, it has the potential to grow very quickly.

“Another country we have high hopes for is Georgia. The issue is not the stage of development – it is not even classified as frontier markets as it doesn’t have enough stocks that qualify for the index. But we think that is likely to change in the near future.”

That said, there are still some interesting frontier markets that are developing at a reasonable pace, including Vietnam and Romania, while Saudi Arabia remains the potential jewel in the crown of frontiers.

Mr Teverson says: “If we see Saudi Arabia open up to foreign investment at some point – at the moment foreign investment is restricted in Saudi Arabia – then the inclusion of Saudi in the index could be a significant positive.

“Just because of what it could do to the overall market capitalisation and liquidity of frontier markets, it would dramatically improve the investability of frontier markets on both counts.”

However, he adds that while there has been the expectation that Saudi could open up at any moment for a number of years, it has yet to happen, so it remains a case of “wait and see rather than trying to put a timeframe on it”.

Meanwhile, Mr Bokor-Ingram adds: “The Vietnamese economy is starting to pick up as they go through a reform process. We expect it to grow 6 per cent this year and 7 per cent next year.

“They’ve cleaned up the banking sector, they’ve clamped down significantly on corruption and they have introduced significant stock market reforms that make the markets more foreign shareholder friendly.

“Romania is a very similar story in Eastern Europe. One of the most significant developments is they have entered a voluntary IMF programme and under that programme they are being forced to privatise parts of the economy to make it more efficient. So you have an economy now that is the second fastest growing economy in Europe after Poland.”

Nyree Stewart is features editor at Investment Adviser