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International Herald Tribune: Around the Markets: Vietnam and Zambia overtake bigger developing countries

EXTRACT: In Nigeria, attacks have forced a Royal Dutch Shell unit to halt production of about 500,000 barrels of oil a day, almost a quarter of the country’s current output.

THE ARTICLE

By Alexis Xydias and Michael Tsang Bloomberg News

Published: February 20, 2007

LONDON: The smallest emerging stock markets are elbowing aside Brazil, Russia, India and China to become the world’s best performers.

An index of 22 so-called frontier countries rose 12 percent in January, the fastest-ever start to a year. Five of them, including Vietnam, Ukraine and Croatia, are among the top 10 markets this year. A measure of BRIC stocks — as the shares of Brazil, Russia, India and China are known — fell after a 53 percent gain in 2006 made Indian and Chinese shares the most expensive among the biggest emerging nations.

J.P. Morgan Chase, Templeton Asset Management and Julius Baer Holding have started funds in the past six months to buy shares in the smallest economies, betting that they will outperform larger developing markets that have rallied for four straight years.

“We’ve started to go into some of the frontier markets,” said Terrence Gray, managing director of emerging markets at DWS Scudder in New York. “We’re just trying to find better value.”

Gray bought shares of KazMunaiGaz Exploration & Production in September when that unit of the Kazakh state-owned oil and natural gas company raised $2 billion in the largest initial public offering in the country. He may invest in banks and agricultural commodity producers in Mauritius, Nigeria and Zambia, he said, after cutting his firm’s holdings in China and India last year.

Frontier markets, as defined by Standard & Poor’s, are dominated by companies too small and too thinly traded to be “investable” for most fund managers. The acronym BRIC was coined by Jim O’Neill, chief economist at Goldman Sachs Group, in 2001. He said Brazil, Russia, India and China would join the United States and Japan as the biggest economies in the world by 2050, eclipsing most current developed nations.

The S&P/IFCG frontier markets composite index has gained 35 percent in the past 12 months, compared with a 28 percent increase in the Morgan Stanley Capital International BRIC index and a 12 percent advance for the S&P 500.

The surge last month in the 272- member frontier markets index, whose members have a median market value of $241 million, was the biggest gain in January since S&P’s calculations started in 1996.

Frontier stocks are less expensive than shares in India and China — which trade at an average 26 and 40 times earnings, respectively — though they are becoming more expensive.

Stocks in the S&P/IFCG index traded at an average 17 times earnings last month, near the highest level ever and 40 percent higher than the average over its 11-year history. The price/earnings ratio for the S&P/IFCG index is also about 10 percent higher than for the MSCI emerging markets index.

Frontier markets have been valued at an 18 percent discount on average during the past decade. Stocks in Bangladesh, Bulgaria, Ivory Coast, Mauritius and Slovenia rose last month to their highest price/ earnings ratios this decade.

“Everybody is so positive and bullish that, as a consequence, valuations have become very rich,” said Patrick Scheuber at Swisscanto in Zurich. “We are not at the beginning of a cycle, but rather at the end of it.”

Investors are courting greater economic and political risk by buying stocks in countries that are among the least developed in the world. Zimbabwe, for instance, is mired in an eighth year of recession. The inflation rate surged to a record 1,594 percent last month as the government printed money to pay off debts. The Zimbabwe dollar has fallen as much as 42 percent since Jan. 20.

In Nigeria, attacks have forced a Royal Dutch Shell unit to halt production of about 500,000 barrels of oil a day, almost a quarter of the country’s current output.

“One has to kick the tires if you are looking for returns,” said Tim Drinkall, who manages assets at Gustavia Capital Management in Stockholm. Six months ago, Drinkall spent 12 hours on a bus to visit Sojaprotein, a Serbian soybean processor, before buying the stock.

Michael Tsang reported from New York.

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