Investment: The Final Frontier
As the US and Europe continue to battle with ongoing financial problems—is now the time to go where not many have gone before?
With around 140 countries considered frontier markets—regions trading at a 25 percent discount to more popular emerging ones—CNBC explores the best opportunities for prospective investors.
Chief Investment Officer at the National Bank of Abu Dhabi, Alan Durrant, explained why a frontier market like the UAE may have issues, but it’s got the cash behind it that other parts of the world are struggling to find.
"An MSCI [emerging markets index] upgrade on its own is not going to be a panacea for all the ills of local markets. We are still dealing here with markets with very low liquidity," he said, admitting that the United Arab Emirates were not ready for an elevation to emerging market status.
But he continued: "There is another story in terms of the frontier markets in the Gulf Cooperation Council (GCC), and that’s income—something which a lot of people are overlooking."
As well as bonds with "really quite decent fundamentals backing them," Durrant said that the frontier investor "can buy property … which at the moment in Dubai is yielding eight or nine percent. And even in the equity market—probably the last place that people would think of looking—the income yield is six or seven percent. And that to us is pretty powerful."
Taking a risk on investment is second nature to many, but a place like the UAE throws up a major issue that puts many off: red tape. It can be a very complicated and drawn-out process dealing in markets where formal codes of practice have not been established and where often different cultural environments make investing a real headache.
In the Gulf, foreign investors cannot own more than 49 percent of a company, a restriction tightened for companies that are regarded as being of national importance. But Durrant says that the notion of a closed market in the UAE is "something of a misnomer".
"Three quarters of the market is open to foreign investment and there is still some headroom in terms of those foreign ownership limits," he said.
The UAE and other Gulf markets have also been on an entirely different frontier in recent months—that of widespread unrest and political change. But Durrant said the Arab Spring has actually helped the region.
"The impact on oil has been that the GDP growth throughout the GCC ... has been very strong. Last year real GDP growth was nearly 8 percent. The forecasting says it’s going to be around 4 percent this year, which compared with a becalmed world economy, we think that is very strong indeed."
So, booming oil incomes, opportunities for investment that are still well below Western market rates, and growth outdoing more developed economies—could this be the final frontier for finance?
In the third special investors' clinic on alternative investments on CNBC, Stuart Culverhouse answered your questions on how to go about investing in frontier markets.