Who wants to invest in Kazakhstan?

Consider this. The developed world is now worth an estimated $44.3 trillion in terms of market capitalization. This includes most parts of the Western Europe, North America, Australia, New Zealand, bits of Asia that is Japan. Emerging markets, including Russia, China, Brazil, India, South Africa, Mexico, account for a total market cap of another $9.2 trillion.

But what does that make of the rest of the world that are not yet one of those emerging economies? What are the next æBRIC fundsÆ of the world going to invest in before something else becomes the next expensive play like China and India?

In pure gross domestic product (GDP) terms, many countries with high growth are not yet considered by index providers as emerging markets. Generally, young democracies with limited track record of market operations and in the midst of political reforms are now labeled as æfrontier marketsÆ û a term fund managers use to differentiate them from the mainstream emerging markets that traditionally include the well-to-do Asian economies and central European states like Czech Republic and Hungary.

18 of the 20 countries with the highest GDP over the past five years include such frontier names - Equatorial Guinea, Angola, Chad, Kazakhstan, Azerbaijian, Turkmemistan, Romania, Armenia, Qatar, Zambia, Nelarus, Sudan, Ukraine, Suriname, Kuwait, Mongolia, Serbia and Taijikistan. Despite their high growth, only seven of these countries have established and functional stock markets.

According to the IFC Global Frontiers Markets Index, total returns over the past five years was at 553% while the MSCI EM Index performed at 430%. This is at a time when mainstream emerging markets are beginning to show up to 75% of correlation with the world marketsÆ volatility.

ôAs they integrate into the global economy, there will even be greater correlation than in the past,ö says Christian Deseglise, head of global emerging markets business at HSBC Investments.

Deseglise sees the correlation largely coming from the increased international participation in mainstream emerging economy investments, as well as hedge fund presence. Although these improved liquidity over time, they spelt the end of diversification benefits and the suitability to continue viewing them as alternative investment class.

ôIn the frontiers world are the infrastructure stocks, domestic demand-related stocks, natural resources, financial stocks,ö he adds, ôThere is a wide variety of stocks in the frontier universe. And they are not necessarily very small.ö

In Kazakstan for example, there are a total of 437 listed companies contributing a market capitalization of $64 billion. Its GDP is likely to triple from $3,910 per capita in 1998 to close to $11,188.1 within a decade. For a population of just 15 million, it holds some of the worldÆs largest mineral reserves û 30% of the worldÆs chromium, 24% manganese and 20% gold. As commodity prices continue to soar, it is one of such frontier names are fund managers are eyeing for over the coming years.

According to HSBC research forecast, top performing frontier markets in the coming year will include Romania, Latvia, Kazakstan, Georgia, Estonia and Lithuania. Better performing frontier markets are driven by rising foreign direct investments, falling inflation, GDP growth and domestic consumption growth. Such fundamentals are reinforced by increasing political stability and rising current account balances over time.

The downside? ôYou cannot short. You cannot do hedge funds. You cannot go in and out quickly. YouÆve got high trading costs. YouÆve got liquidity issuesö says Deseglise. However, he counters, ôThis is the beauty of it. They are largely immune from the large swings that you see in liquid markets. They donÆt really follow the big movements in the worldÆs big markets.ö

Deseglise admits corporate governance and corruption are problems in investing in new economies. ôIssues may be more acute than in frontier countries than in emerging markets, because they are in an earlier stage of development.ö He stresses careful analysis and extra caution compared to emerging market investments. ôBut by investing early, you can expect a trend of improving corporate governance and benefit from improvements in institutional frameworks, potential re-rating, potential reduction in equity risk premium,ö he adds.