by M.J. Mohamed Iqbal, EW Correspondent

The top frontier markets can be found in the Middle East due to strong economic growth, cheap valuation and abundant liquidity. In this region, the largest frontier market is Saudi Arabia (with capitalization of US$371 billion), followed by Kuwait (US$197.4 billion), the U.A.E. (US$179.1 billion), Qatar (US$84.2 billion), Jordan (US$35.7 billion), Bahrain (US$27 billion), Oman (US$18 billion) and Lebanon (US$7.9 billion).

The report added that there is no strict definition of a frontier market. Generally, they are developing economies with undeveloped equity markets. A recent report from Merrill Lynch loosely defined frontier markets as representing nearly one billion people, having a nominal gross domestic product of US$2.4 trillion and an equity market cap of US$1.7 trillion.

As emerging markets mature, investors are looking for opportunities in previously untapped markets. Hence the rising interest in frontier/emerging markets. The common thread is not demographic or economic, but rather an underdeveloped equity market. Frontier markets tend to be young, thinly traded equity markets with weak regulatory frameworks, and low levels of transparency and foreign ownership.

Since 2000, the Standard & Poor (S&P) frontier-market index has annualized returns of 24 percent. Note that the Morgan Stanley Composite Index (MSCI) is currently in the process of launching a frontier-market index. The proposed MSCI frontier-market index is dominated by the markets in the Middle East and emerging Europe. Kuwait and the U.A.E. will comprise 44 percent of the index alone. Financials are projected to be the largest sector and account for almost 50 percent of the new index.

The best reasons to invest in frontier markets are strong equity market returns, uncorrelated returns, undercapitalized equity markets, under-owned markets, strong economic growth potential, underleveraged economies and strong returns. Frontier markets have outperformed both emerging and developed equity markets since the inception of the S&P frontier index in January 2000.

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