Emerging Markets Crash and Burn: Look to Africa & Middle East Frontier Instead

Last week, the Wall Street Journal produced an article entitled: "Brave New Stocks," with the header: "Fund Firms broaden their horizons as India, Brazil, and China become yesterday's news. The quest: markets that zig when the U.S. zags."

The article describes, partly as a result of the highly correlated behavior of the emerging markets to the U.S in the recent financial turbulence, that investors who seek diversification need to be looking at frontier markets.

The argument is that if investors want to be truly diversified, frontier markets such as Peru, Oman, Qatar, and Vietnam, offer the most uncorrelated equities. In addition, the article describes that infrastructure spending will fuel extremely positive growth (despite recent turbulence) in the long term horizon (5, 10, 15 years).

I couldn't agree more. I don't think that investors need to have an extremely significant portion of their assets in frontier markets due to some of the risks positioned there. However, after looking at the Emerginvest heat map all week, I think the recent shock waves to the global markets sends a clear message that merely holding Chinese or Indian equities does not constitute a diversified portfolio.

The article puts particular emphasis on the Middle-Eastern and African Markets. It cites Nigeria and Qatar as some of the most promising prospects: "Mr. Upton [senior portfolio specialist for Morgan Stanley's Frontier Emerging Markets Funds] says …Nigeria, for instance, has a population of 150 million, but just 10 million have bank accounts. 'It's like investing in Brazil or Poland 10 to 15 years ago.'" It brings up an astute point in that the main commodity staples of a region, aren't necessarily what you hope to buy with a frontier fund:

"Ironically, investing along the frontier often bypasses the products for which these countries are known. For example, the best opportunities in the Persian Gulf aren't in oil, Mr. Upton says. Oil is a commodity and the companies in that industry are mostly based outside of the Middle East; oil and energy-materials companies only account for 10% of Gulf states' markets.

But oil money fills the Gulf states' coffers. "Infrastructure spending is set for years to come," Mr. Upton says. In addition to construction, other promising sectors in the region include telecommunications and financials."

For these two regions, it highlights respective funds: Market Vectors Africa ETF (AFK) from Van Eck Associates, which has holds stakes in Egyptian telecom, Nigerian banks/breweries, and South African gold-mining, and Rowe Price Africa & Middle East Fund (TRAMX), which holds positions in Commercial Bank of Qatar, and the Dubai Financial Market.

It does note the illiquidity of some of these markets, and inherent political risks with most of the frontier, however it states that most investors need to be looking ahead to the 5, 10, and 15 year timeline, where most of the growth will come from.

Other vehicles to enter emerging markets outlined in the article are the Claymore/BNY Mellon Frontier Markets (frontier markets ETF introduced in June (FRN)) (XFRNX) and PowerShares MENA Frontier Countries (invests mainly in Kuwait, and UAE) (PMNA)

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Emerginvest is an international finance portal, helping investors find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.