Frontier emerging markets outperforming BRICs
Deutsche says credit turmoil has helped emerging marketsStratification between less developed and more developed emerging markets has grown in recent years with investors differentiating between highly developed, stable economies within the emerging markets asset class such as South Korea and fragile ones such as politically risky-Lebanon.
"Traditional emerging markets are getting to a level of development that makes it more difficult to sustain the growth that we've seen in the past," said Andrea Nannini, senior portfolio manager at HSBC asset management arm Halbis which launched a frontier markets in February.
"People are looking to the next step."
Halbis, which in February raised $250 million (125 million pounds) for a closed-end frontier markets fund, sees under-developed infrastructure as a key feature shared by all frontier markets.
"Across all the frontier markets we invest in, a recurring theme is the infrastructure build-up. This includes components of infrastructure such as construction companies, cement-makers, real estate firms," said Halbis' Nannni, who was particularly upbeat on the oil-fuelled building boom in the Middle East.
Sub-Saharan Africa's under-developed financial sector is also proving attractive, with some fund managers picking out Nigeria's banks as promising.
Rising business costs in larger emerging economies such as China and India is another investment theme.
"We're seeing a shift in production activity from emerging to frontier markets. Traditional BRIC markets have seen significant price increases, especially in wages, so now they're more expensive manufacturing bases," said Tim Drinkall, U.S.-based portfolio manager at Morgan Stanley's Frontier Fund.
Pharmaceutical contract manufacturing, for instance, has begun to move from India to neighbouring Bangladesh, whose least developed country status allows it to produce cheap copies of patent-protected medicines until 2016 under a World Trade Organisation agreement.
"Many of these smaller markets are not entirely new but investors passed them by in the past. We're now finding that they're growing rapidly," said Mark Mobius, who oversees over $40 billion in emerging markets assets at Templeton Asset Management.
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