Frontier market gains should not be ignored

The average return for the top six frontier economies was 26 per cent this year.

As the UAE continues its efforts to be reclassified as an emerging market, the potential in frontier markets should not be overlooked.

The top six frontier economies in the region - Bahrain, Kuwait, Qatar, Jordan, Lebanon and Tunisia - have produced an average return of 21.6 per cent this year, reflecting a rebound in the performance of frontier markets generally.

China, considered by many to be the driver of economic growth globally at the moment, returned 13.6 per cent, a recent study by Russell Investments shows.

Many investors shy away from frontier markets because of their volatility and instability, which is one reason the UAE is keen for benchmark indexes such as FTSE and MSCI to upgrade the country's status.

MSCI this year ruled the UAE was still a frontier market, while FTSE upgraded the country to the "secondary emerging market" classification.

But frontier markets retain the potential for solid returns for investors willing to take on the risk, with the MSCI Frontier Market Index jumping 20 per cent in the past six months.

The Russell study did not include the UAE bourses.

Analysts have said the country's reclassification could end the trend of thin volumes and illiquidity in the bourses this year and help it to shake off the restructuring problems of its battered property sector.

"Automatically [the reclassification] has an impact," said an analyst at an international bank based in Dubai. "It opens the UAE up to a large pool from abroad to invest but how tangible this will be and how quickly it takes for new investors to get know the market to invest will depend."

In the meantime, the performance of other frontier markets show the classification is not always a drag.

To qualify for an upgrade, a country's equity markets must be open to foreign investors to a certain degree, and UAE markets have made strides in this direction. This month, the Axiom Telecom public offering was aimed at foreign institutional investors.

The markets' legal and regulatory systems also need to continue to develop.