Qatar, China Top Ranking of Frontier and Emerging Markets

King Abdullah Economic City
Saudi Arabia is spending hundreds of billions of dollars to create new cities, retail centers, schools and hospitals. Photograph: Susan Baaghil/Reuters/Landov

Amer Khan says he could sense a stock market rally in late 2012 just from the street scene in Dubai, the financial capital of the United Arab Emirates. Tourists were once again jostling for a spot from which to watch the dancing fountains that adorn the downtown area. Recurring traffic jams, increasing retail sales and a rise in airport passengers were other signals for Khan, the senior executive officer at Dubai-based Shuaa Asset Management.

“The signs in the economy were visible before the market took off,” says Khan, whose firm had 780 million dirhams ($212 million) under management at the end of September. “We waited for the pop and eventually it happened.”

Dubai’s benchmark stock index, in the doldrums for two years, rose 117 percent in 2013, including reinvested dividends, leading the world, Bloomberg Markets magazine will report in its March issue. That helped Khan’s Arab Gateway Fund, which invests throughout the Middle East and North Africa, return 39 percent.

Dubai’s performance was part of a surge by three Persian Gulf nations -- Qatar, the U.A.E. and Saudi Arabia -- which jumped to the top of Bloomberg Markets’ third annual ranking of the most-promising frontier markets in which to invest.

Three Asian nations led the separate emerging-markets ranking, with China No. 1 for the third consecutive year, followed by South Korea and Malaysia.

MSCI Inc., the publisher of equity indexes, designates countries as emerging or frontier based on a variety of criteria, including trading volumes, restrictions on foreign investors, corporate governance, and currency and political stability.

19 Measures

The Bloomberg Markets ranking is based on 19 measures of the investing climate, from forecasts of gross domestic product growth for the next two years to the ease of doing business. The gains for the Gulf nations came as Brent crude oil prices remained above $100 a barrel for the third year, and the petroleum producers used their huge revenues to diversify their economies.

Qatar and the U.A.E. have progressed to a point that MSCI said on June 11 it would upgrade them from frontier to emerging status in May.

“In these countries, you see a burst of construction, which is reminiscent of what you saw in China in the 2000s, when they came up with the high-speed bullet trains, the airports and all the new infrastructure -- which opened up the interior of the country,” says Arjuna Mahendran, chief investment officer at the wealth management division of Dubai-based bank Emirates NBD PJSC.

Saudi Growth

Saudi Arabia’s economy, the largest in the Middle East, expanded at a 5.9 percent average pace during the decade ended on Dec. 31, up from 2.3 percent in the previous 10 years and faster than the global average of 3.8 percent, according to the International Monetary Fund.

Qatar will probably post the quickest growth in 2014 at 5 percent, while Saudi Arabia and the U.A.E. will both expand about 4 percent, according to the IMF.

Frontier markets were a more profitable place to invest in 2013 than emerging markets -- a trend that’s likely to continue into 2014, analysts say. The MSCI Frontier Markets Index rose 21 percent in 2013, outpacing the MSCI Emerging Markets Index by 26 percentage points, the widest annual gap since 2005. Corporate earnings in the 26 countries that make up the frontier index have risen to the highest level in five years. Profits in the MSCI emerging index, which is dominated by Brazil, Russia, India and China, are still 11 percent below their 2011 high.

Market Rout

Emerging-market currencies have tumbled in the past week as China’s economy showed new signs of weakness and political turmoil from Thailand to Turkey spurred capital outflows. More than $1.1 trillion of value has been erased from emerging-market equities since the U.S. Federal Reserve signaled in May that it would start scaling back on debt purchases that have boosted demand for high-yielding securities, including developing-nation stocks and bonds.

Among the so-called BRICs, China is the only market in the top 10 of the 22 emerging-market countries ranked by Bloomberg Markets.

“China is going to continue to grow, although at a slower pace than in the past,” says Mark Mobius, who oversees $53 billion as chairman of Templeton Emerging Markets Group. “The reform process is going to result in more volatility.”

China Slowing

China expanded in 2013 at a 7.7 percent rate, the same pace as in 2012. The economy is forecast to grow 7.4 percent in 2014, according to a Bloomberg survey of economists. The Shanghai Composite Index slumped 3.9 percent in 2013, including reinvested dividends, as slowing growth curbed corporate earnings.

The Chinese government has pledged to stimulate the economy by allowing more private investment in state-controlled industries. And for the first time since the one-child policy was proclaimed in 1979, the Communist Party said on Nov. 15 it will permit couples to have two children if either parent is an only child. The move is intended to repopulate a rapidly aging workforce.

The government, in a four-day Communist Party conclave in November, also said it will accelerate convertibility of the yuan, free up interest rates, improve Treasury yield curves and let qualified private investors set up small- to medium-sized banks.

The other BRICs are floundering.

India’s Woes

As of September, India, which is No. 21 in the Bloomberg Markets ranking, had seen four straight quarters of economic growth below 5 percent, while Standard & Poor’s said in November it may cut the country’s credit rating to junk.

The GDP of Brazil, No. 15 on the emerging-markets list, fell 0.5 percent in the third quarter, the biggest drop since the first quarter of 2009.

Russia, No. 14, saw its GDP expand 1.3 percent in 2013, also the weakest rate since 2009. Russia’s growth has decelerated or remained unchanged every quarter since Vladimir Putin won a new term as president in March 2012.

To some extent, the emerging markets were at the mercy of the Fed decision to taper its bond purchases, which caused investors to flee riskier markets. Such macro forces had less impact on frontier markets, says Sean Wilson, chief investment officer at New York–based LR Global Partners, which oversees about $200 million in developing-nation investments.

Construction Boom

“It’s the local consumption growth, infrastructure spending and reforms, the broadening and deepening financial services sectors that matter to these markets,” he says. “If you looked at each one of the countries, there’s some domestic infrastructure plays that are propelling the economy.”

It was the construction and retail sectors -- not the state-owned oil and gas industries -- that led the big market gains in Qatar, the U.A.E. and Saudi Arabia.

Qatar, which has the world’s third-largest reserves of gas and the highest per capita income, will host the 2022 soccer World Cup.

“This is the largest sports event in the world,” says Rami Sidani, a money manager at Schroder Investment Management Ltd. in Dubai. “And Qatar is going to be spending more than $180 billion in infrastructure projects to be ready to hold this event.”

The tiny Gulf country’s GDP last year was $200 billion, the IMF says.

‘Real Prize’

In Saudi Arabia, “strong oil prices have allowed the government to spend billions each year on infrastructure, housing, schools and hospitals,” says Brent Clayton, an LR Global emerging-markets money manager. “While Saudi Arabia is known for its oil, it is the nonoil sectors of the economy -- companies tied to consumption growth and construction spending - - that represent the real prize to investors.”

Only investors within the Gulf Cooperation Council -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the U.A.E. -- can invest directly in Saudi Arabia, where the benchmark stock index rose 26 percent in 2013. Outsiders access the market through mutual funds and derivatives sold by investment banks.

The comeback story of the region is the emirate of Dubai, which at the height of the financial crisis was on the verge of default. It has been a key beneficiary of the unrest elsewhere in the Middle East, says Tim Drinkall, a New York–based money manager at Morgan Stanley Investment Management.

Dubai Tourism

“Your traditional tourist destinations have been places like Beirut, Lebanon, and all of Egypt,” he says. “All those destinations essentially have been closed down. You are finding a tourism pickup in Dubai.”

The emirate also won the right to sponsor World Expo 2020, an event held every five years that is a stage for nations to show off their economic progress.

“This confirms Dubai’s position as the financial gateway, the trading hub, the link between the East and the West,” Schroder’s Sidani says. The Dubai economy will grow an average of 6.4 percent a year over the next three years, Barclays Plc said in a Nov. 26 report.

Sven Richter, who oversees about $260 million as managing director of frontier markets at Renaissance Asset Management Ltd. in Johannesburg, says the top frontier markets aren’t in the Middle East; they’re in Africa.

“At the moment, the best opportunity is in Kenya and Nigeria,” Richter says, “because of the young population, the consumer spending power, fast-growing GDP, low government debt. Prices are very attractive. I would rank them higher than Middle East countries.”

African Names

Nigeria ranks No. 15 in the Bloomberg Markets frontier list; Kenya is not ranked.

Andy Brown, a London-based emerging-markets money manager at Aberdeen Asset Management Plc, which oversees about $322 billion, has a long list of what he calls “good quality” public frontier-market companies. He names Nairobi-based East African Breweries Ltd. and Safaricom LTD.

“In Nigeria, Zenith Bank is locally owned and managed and has a very strong deposit-gathering franchise,” Brown says. “Most importantly, it is well capitalized, so it has a buffer when the bad times come.”

Bad times come more often to frontier markets than to their emerging counterparts, and investors have to be acutely aware of the risk, Brown says. One issue is the markets’ small size. About $6.2 billion of Dubai-based shares changed hands in December, versus $613 billion in China, according to data compiled by Bloomberg.

“From a liquidity perspective, you have to be long term in your approach because it costs a lot to trade,” he says. “The markets are relatively thin. You don’t really want to be trading in and out on a regular basis. It can certainly be a bumpy ride.”

How We Crunched the Numbers

Bloomberg ranked frontier and emerging markets based on each country’s overall investment climate on a projected risk-adjusted-return basis through 2015. Countries were awarded points for their performance on each of 19 economic, financial, political and social indicators.

The worst-performing country received zero points, while the best-performing received the maximum number of points assigned to that category. All other countries received points on a percentile basis between those two extremes. Scores for all variables were summed, with the range for the final score being 0 to 100.

The categories included forecasts through 2015 for gross domestic product growth, inflation, current-account balance, government debt and total investment. Countries were also scored on their current labor participation rate, amount of foreign reserves held and level of infrastructure development, as reported by the World Economic Forum.


We also used the current price-to-book ratio of the primary equity index and current two-year credit-default-swap spread, an indication of the perceived quality of a country’s sovereign debt.

We scored the liquidity of each country’s primary equity index and the volatility of its exchange rate over the past three years. Social and political variables included the adult literacy rate, the Economist Intelligence Unit’s banking and political risk scores, Transparency International’s corruption index and the World Bank’s measure of the ease of doing business.

All data were the latest available as of Jan. 6, 2014.

GDP, inflation and current-account forecasts are based on data compiled by Bloomberg, except for Morocco, whose figures are from the International Monetary Fund. The IMF provided forecasts for government debt and total investment; Bloomberg provided data for price-to-book ratio, liquidity, CDS spreads

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