TAKE a country that has amassed a $40 billion oil fund, where the stock market has soared 64% over the past year and that has just overtaken Ire-land as the second-biggest consumer of Guinness (after Britain). Sounds like an interesting investment opportunity.

Then what if I told you this was Nigeria, Africa’s largest country by population and renowned more for its e-mail scams than its investment oppor-tunities? You would most probably run a mile.

Reserve your judgment for a moment, though. While the British and American stock markets have dropped 10% over the past six months as the credit crisis has deepened, Nigeria has quietly been chalking up gains of 35%. It is not alone: investment “backwaters” such as Morocco, Bangladesh and Pakistan are up 27%, 22% and 18% respectively These “frontier” stock markets are among the few undervalued opportunities in the world. They were left behind in the great emerging-market bull run of 2003-7, which saw billions of dollars flow into Brazil, Russia, China and India (known collectively as the Brics), but equally they have not been hit as hard by the credit crunch.

Since the start of the year, investors have pulled an astonishing $20 billion (£9.9 billion) of hot money out of emerging markets – half what they put in last year – and the Brics have borne the brunt. China’s index has plunged 38% in six months.

All but the bravest investors would have shunned Russia 10 years ago, but its market is up an astonishing 5,000% since then and managers are talking about frontier markets as a similar once-in-a-decade opportunity.

Goldman Sachs, the investment bank, first focused on frontier markets in 2005. It coined the term Next 11 to describe the countries that, behind the Brics, were most likely to rival the G7 in the coming decades, at least in terms of new growth.

Nigeria’s economy could overtake those of Canada by 2041, Italy by 2044 and even France by 2050 if it delivers sustained growth, according to Goldman. That would make it the eleventh-biggest, behind Germany (tenth place) and Britain (ninth). Viet-nam could overtake Italy in 2044 and Canada in 2047.

Nigeria’s expansion has been phenomenal: its population exceeds that of Russia and its capital, Lagos, has grown from 300,000 in 1950 to 18m today.

It has paid off all its foreign debt, has its own central oil fund of $40 billion and has a credit rating on a par with Turkey, according to Nick Price of Fidelity’s Emerging Europe, Middle East and Africa fund, who is finding some great opportunities.

In a country of 150m, there is just one dominant retailer, South African-listed Shoprite. Its like-for-like sales rose 25% last year, it is operating on healthy margins of 7% to 8% because there is so little competition and its price/earnings ratio is 11.

Compare that with Poland. All the big retailers, including Britain’s Tesco and France’s Carre-four, have a presence there, which means that Tesco’s margins are a relatively thin 4%.

Africa is also benefiting from the influx of billions of dollars of Brics wealth. Botswana, one of the oldest democracies in Africa, is the world’s largest diamond exporter, which has helped it achieve a current-account surplus of which Britain and America can only dream – 19% of gross domestic product.

That’s an old story, though; what’s new is that it has become a destination for Indian companies such as Sitel India seeking cheaper sites for their call centres, just as Western companies outsourced to India, according to Lars Kalbreier at Credit Suisse.

There are examples of inward investment from Brics countries all over the continent. Emaar Properties, one of the firms behind Dubai’s building boom, is also one of the largest investors in north Africa. The UAE will pump about $30 billion into Tunisia over the next 10 years, doubling the size of its economy.

Frontier-market specialists such as Dr Slim Feriani at Progressive Developing Markets are even talking about Pakistan and Zimbabwe, which is up an astonishing 58% in the past month alone on hopes that Robert Mugabe is on his way out.

Progressive, set up by Nigel Wilson, former chief investment officer of the Bank of England, has 2.2% of its Advance Frontier Markets fund in Pakistan and 1% in Zimbabwe.

You can track the S&P Select Frontier index with an exchange traded fund from Deutsche Bank. Visit dbxtrackers.co.uk. Alternatively, adviser Killik & Co suggests Advance Frontier Markets or the Arab Gateway fund.

Kathryn Cooper is editor of the Money section

THE WORLD IN 2050
World's biggest economies in 2050, according to Goldman Sachs

China
United States
India
Brazil
Mexico
Russia
Indonesia
Japan
UK
Germany

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