Banking and consumer-related stocks in countries like Nigeria, Qatar and Saudi Arabia are attractive plays to tap domestic growth in frontier markets, says the head of London-based investment firm Advance Emerging Capital.
-- Plans open-ended fund launch to meet increased demand
-- Fund has most exposure to Nigerian, Qatari, Saudi stocks
Slim Feriani, chief executive and chief investment officer of the emerging and frontier markets firm, said compelling valuations, improving fundamentals and an early entry to what could be the future emerging markets of the world were the key drivers to invest in frontier countries in 2011.
"The perception is that frontier markets are riskier. We believe that is not the reality on the ground. Are countries like Qatar or Mauritius riskier than China? I do not think so," he told Reuters in an interview. The firm is launching an open-ended Advance Frontier Opportunities Fund to complement its existing $145 million Advance Frontier Markets Fund, which had returned about 22 percent in the 11 months to the end of November 2010.
Feriani is betting on banking stocks in countries such as Qatar and United Arab Emirates, where economic growth has been driven by a rise in commodity prices such as oil and natural gas. "Most of the banks are plain vanilla lenders who operate on seriously good margins. It is a no-brainer that you need to have exposure in them to play on the domestic growth story," he said.
The fund manager likes Qatar National Bank (QNB) and National Bank of Abu Dhabi (NBAD) among banking stocks and has stayed away from Dubai-based lenders, which have been hit hard by rising provisions stemming from a property crash, he said. QNB rose 62 percent in 2010 on Qatar's exchange, while shares in NBAD gained 2.1 percent on the Abu Dhabi bourse.
Among consumer-related investments he prefers stocks such as Guinness Nigeria, a unit of Diageo. The stock rose 54 percent in 2010. "When people have money, they start consuming more," he said. Frontier markets have been largely overlooked during a two-year rally in emerging stocks. Emerging markets saw inflows of about $84 billion in 2009, while inflows into frontier markets remained negligible, Feriani said.
And in 2010, when emerging markets may have seen more than $90 billion flowing in, inflows to countries classified as frontier have not been more than $2 billion, he said. In the last six months, there have been signs of investors returning to frontier markets, according to the executive.
"These are smaller markets. A few millions will go a long way in boosting them," he said. Geographically, the fund's biggest allocation is in Nigeria, with 8 percent, while Qatar accounts for 7 percent and Saudi Arabia 5.5 percent of the fund, he said. The fund manager believes that some of the issues that plagued markets in regions such as the Gulf are well beyond its peak, providing an opportunity to investors to tap into the domestic growth story. "The issues in the Gulf are still out there, but the biggest and darkest clouds are behind us. The peak of the clouds was end of 2008 or early 2009," he said.