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By Sam Quest

The iShares MSCI Frontier Market ETF (NYSEARCA:FM), the iShares MSCI Emerging Market Index (NYSEARCA:EEM) and the S&P 500 have all demonstrated a bullish trend this year. However, in terms of returns, the Frontier Market Index has performed better, demonstrating a return of 15.5% year-to-date (YTD) compared to an 8.14% increase in the Emerging Market Index and a 7.46% increase in the S&P 500.

Frontier Markets In Focus

The Morgan Stanley Classification Index (NYSE:MSCI) of frontier markets includes those countries that are considered pre-emerging and meet a certain liquidity requirement. Nigeria and three Middle Eastern countries - Kuwait, Qatar and the United Arab Emirates - form the top four holdings of the fund in terms of the geographical regions and constitute a share of around 59% of the total holdings.

The International Monetary Fund recently upgraded its growth forecast for the UAE due to Dubai's World Expo 2020 win, coupled with rising real estate prices. As per new IMF estimates, the UAE economy is set to grow at a rate 4.4% this year, as opposed to its October estimates of 3.9%. Real estate prices in Dubai have demonstrated an increase of 33% on a year-over-year basis in the first quarter that ended in March. Moreover, Dubai also won the right to host the World Expo 2020, which will bring revenue to the economy. The UAE also holds 6% of the world's oil reserves, an indicator of high potential in the future.

Similarly, the IMF also updated its GDP growth forecasts for Qatar to 5.9% as compared to 5% previously. This was done on the back of a large public investment program initiation in order to boost economic diversification and preparation for the 2022 FIFA World Cup. Moreover, Qatar is the largest exporter of LNG in the world and LNG prices reached a seven-year high in 2013, leading to an extra export of 6.64 million metric tons to Europe as opposed to contracted exports of 19.65 million metric tons.

Furthermore, Nigeria surpassed South Africa as Africa's largest economy according to 2013 revised GDP figures. As per the new figures, Nigeria's GDP for 2013 was $510 billion as opposed to previous estimates of $262 billion, representing a growth rate of 7.3%. The reason for this increase is that Nigeria updated its base year to 2012 from 1990. These revised figures are far more accurate since weights of sectors were updated according to their contribution. The telecom sector's weight was equal to 9% of the GDP, as opposed to the previous weight of less than 1%.

National Bank of Kuwait (NBK), Kuwait Financial House (KFH) and Mobile Telecom Co. form the top three holdings of the MSCI Frontier ETF. The revenue of National Bank of Kuwait is also expected to grow by 8.2% and 1.7% YoY in 2014 and 2015. Its earnings per share (EPS) is expected to grow by 38.7% and 20% in 2014 and 2015, respectively. It is currently trading at a forward price-to-earnings (P/E) multiple of 12.44x, at a 13.9% premium to industry.

Kuwait Financial House revenue is expected to grow by 9.8% in 2014 and 3.8% in 2015 as per analysts' estimates. Its EPS is expected to grow by 43.1% and 34.2% in 2014 and 2015. It is currently trading at a forward P/E multiple of 18.05x, at a premium of 27.3% compared to the industry.

Analysts estimate Mobile Telecom Corporation revenue to grow by 3.4% in 2014 and 4.2% in 2015. Its EPS is expected to grow by 22% in 2014 and 11.5% in 2015. It is trading at a forward P/E multiple of 9.85x, at a 13% discount to industry.


Considering the aforementioned factors and higher returns, frontier markets present an excellent opportunity for investors in order to diversify their portfolios. Apart from the economies themselves, the index also contains the largest companies in the respective countries, which are capitalizing on the growth opportunities present in these countries.

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Disclosure: No positions.