BofA's Guide To The 5 Hottest Frontier Markets

Photo: Wikimedia Commons/Jósa Levente Zoltán, Jósa András

Stock markets around the world are taking a hit due to the ripple effects across the global economy of the euro crisis and the Asia slowdown. However, Bank of America Merrill Lynch analysts Wesley Fogel and Michael Harris see bright spots in the frontier stock markets around the Middle East.

Frontier markets are high risk, high growth regions that are on the verge of becoming a classified as an emerging market.

BofA argues that these markets “fairly significant and still overwhelmingly under-owned long-term investment opportunity.”

The strategists honed in on five markets: Saudi Arabia, Qatar, United Arab Emirates, Kazakhstan, and Nigeria.

We broke down their analysis of each markets’ economy, demographics, and stocks.

Saudi Arabia: the economy

Trade partners: Saudi Arabia ships about half of all of its exports to Asia, and 87 per cent of its exports are energy-related.

Important sectors: BofA calls Saudi Arabia a 'consumption and investment story,' pointing out that exports as a share of GDP have fallen from 29 per cent of GDP in 2000 to 17 per cent of GDP today, while imports have risen over the same period from 17 per cent to 27 per cent.

Macro drivers: Saudi stocks are highly correlated with credit growth and inflation. Credit growth in Saudi Arabia is accelerating whereas inflation is decelerating.

Source: BofA Merrill Lynch

Saudi Arabia: the demographics

Migrants: 28 per cent of the Saudi population is migrant workers from outside of the country.

Urbanization: Over 80 per cent of the Saudi population lives in urban areas.

Average age: The median age in Saudi Arabia has been rising steadily in recent years, but at 25, it still makes the country one of the youngest in the Middle East.

Source: BofA Merrill Lynch

Saudi Arabia: the stock market

Composition: Financials make up 43 per cent of the Saudi Stock Exchange by market cap.

Oil and gas stocks, on the other hand, make up less than one per cent of the market.

Valuation: Saudi stocks are currently trading at a 13 per cent premium to global emerging markets stocks versus a historical average premium of 43 per cent.

Source: BofA Merrill Lynch

Qatar: the economy

Trade partners: Qatar sends about half of all of its exports to Japan and Korea, and 94 per cent of its exports are energy-related.

Important sectors: The energy sector generates 47 per cent of GDP while the construction sector employs 44 per cent of the workforce.

Macro drivers: Qatari stocks are highly correlated with money supply growth and a bit less so with credit growth, both of which are slowing rapidly.

Source: BofA Merrill Lynch

Qatar: the demographics

Migrants: 86 per cent of Qatar's population are migrants from outside of the country.

Urbanization: Over 90 per cent of the population of Qatar lives in urban areas.

Population growth: In the next 10 years, it is expected that Qatar's population growth rate will fall below 1 per cent.

Source: BofA Merrill Lynch

Qatar: the stock market

Composition: Financials also dominate Qatari stocks -- they comprise 62 per cent of the index by market cap, up from 45 per cent in 2006.

Valuation: Qatar's stock market is currently trading in line with global emerging markets stocks versus a historical average premium of 23 per cent.

Source: BofA Merrill Lynch

United Arab Emirates: the economy

Trade partners: The two biggest export destinations for UAE goods are Japan and India, who make up 19 per cent and 18 per cent of UAE exports, respectively.

Important sectors: The energy sector comprises 57 per cent of exports while only employing 1 per cent of the workforce.

Macro drivers: UAE stocks are highly correlated with inflation, which is rising from low levels.

Source: BofA Merrill Lynch

United Arab Emirates: the demographics

Migrants: 70 per cent of UAE's population are migrants from outside of the country.

Urbanization: The fraction of the population living in urban areas in UAE is over 80 per cent and rising.

Average age: UAE is expected to age rapidly over the next 20 years, with one per cent of the population currently aged 65 or older projected to grow to six per cent of the population by 2030.

Source: BofA Merrill Lynch

United Arab Emirates: the stock market

Composition: Like Saudi Arabia and Qatar, UAE's biggest market sector is financials, which comprise 73 per cent of the total market cap.

Valuation: The UAE stock market is currently trading at an 11 per cent discount to global emerging markets stocks versus a historical average premium of 18 per cent.

Source: BofA Merrill Lynch

Kazakhstan: the economy

Trade partners: Kazakhstan ships about half of its exports to Europe and a quarter of them to China.

Important sectors: Energy comprises 84 per cent of Kazakhstan's exports while the agricultural industry is the biggest employer, employing 25 per cent of the workforce.

Macro drivers: Kazakh stocks are highly correlated with industrial production growth, which is slowing, and money supply growth, which is also slowing but still remains elevated.

Source: BofA Merrill Lynch

Kazakhstan: the demographics

Average age: Kazakhstan is young, with a median age of 29, which is expected to increase to 33 over the next two decades.

Population growth: The population growth rate is projected to stay below one per cent over the next 20 years.

BofA says that 'Kazakhstan's population growth rate has been unstable over the past 50 years because of its small population size.'

Source: BofA Merrill Lynch

Kazakhstan: the stock market

Composition: Kazakhstan's benchmark MSCI index only tracks three stocks (two banks and an energy company).

The energy company, Kazmunaigas, is 85 per cent of the index by market cap.

Valuation: The UAE stock market is currently trading at a 48 per cent discount to global emerging markets stocks versus a historical average discount of 33 per cent.

Source: BofA Merrill Lynch

Nigeria: the economy

Nigeria: the demographics

Average age: Nigeria is one of the youngest nations in the Middle East/North Africa region with a median age of 18.

Urbanization: Right now about half of all Nigerians live in urban areas, but the proportion has been increasing in a linear fashion since 1950 and is expected to continue to do so.

Fertility rate: Nigeria's fertility rate has been declining but is still quite high at an average of 5.5 children born per woman.

Source: BofA Merrill Lynch

Nigeria: the stock market

Composition: Nigeria's benchmark MSCI stock index is 48 per cent consumer staples names by market cap and 45 per cent financials.

Valuation: The Nigerian stock market is currently trading in line with global emerging markets stocks versus a historical average premium of 56 per cent.

Source: BofA Merrill Lynch

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