Oct. 12 (Bloomberg) -- Frontier-market equities will outperform emerging-market stocks next year, led by gains in Middle Eastern shares, said HSBC Holdings Plc’s Andrea Nannini, whose fund has more than doubled the benchmark index this year.

“The frontier markets will perform very well in 2010,” said Nannini, who manages $150 million including the HSBC New Frontiers Fund, which has gained 47 percent in 2009. “The Middle East will lead the way, driving frontier markets higher. The rally may start as early as the fourth quarter this year.”

The MSCI Frontier Markets Index has climbed 23 percent in 2009, trailing a 67 percent rally for MSCI Inc.’s benchmark emerging-markets gauge. The frontier index trades at 9 times estimated earnings, while the MSCI Emerging Markets Index of 22 developing nations fetches 16 times estimated profit.

Frontier-market stocks should be trading “in line” with developing-nation equities, Nannini said in a telephone interview from London.

“Traditionally, frontier markets have traded in line or even a slight premium,” Nannini said. He predicts frontier markets will outperform in the next three to nine months.

Nannini boosted his allocation for Middle Eastern stocks to 50 percent from 40 percent, saying that shares are “very cheap” and the region’s equities will catch up with its global counterparts as corporate earnings improve. He recommends bank stocks in the United Arab Emirates and Nigeria and industrial companies in Eqypt.

“The Middle East is still a region that hasn’t recovered,’ he said. “Valuations are very cheap.”

‘Gloom and Doom’

Dubai’s benchmark index rose to the highest level in 11 months today, extending gains this year to 43 percent. Emaar Properties PJSC’s chairman said on Oct. 9 the sheikhdom may raise a further $10 billion next month to help state-related companies through the credit crisis. Dubai, the second-biggest of seven sheikhdoms that make up the U.A.E., and its related companies borrowed more than $80 billion to transform the economy into a tourist and financial services hub.

“There was gloom and doom in Dubai and concern it might go bust,” Nannini said. “That’s not going to happen.”

The fund manager said he was less bullish on Latin American markets such as Peru and Colombia after an 88 percent gain for the region’s benchmark this year. Peru’s Lima General has jumped 121 percent this year, the world’s second-best performing index out of the 88 benchmark measures tracked by Bloomberg.

The MSCI EM Latin America Index trades at 16.9 times reported earnings, compared with its five-year average of 12.8 times profit, according to weekly data compiled by Bloomberg.

“We don’t see a lot of value because they are expensive,” Nannini said. “The low-hanging fruit has already been picked.”

To contact the reporter on this story: Allen Wan in New York at awan3@bloomberg.net

Last Updated: October 12, 2009 15:32 EDT