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By Holly Cook| 4-24-2014 7:00 AM

Frontier Markets Offer Strongest Growth Over the Next Decade

With most emerging markets offering growth at a similar pace to developed markets, T. Rowe Price's Oliver Bell sees frontier markets as the most promising over the next decade

Holly Cook: Welcome to the Morningstar series, "Why Should I Invest with You?" Joining me today is Oliver Bell, he is manager of the T. Rowe Price Middle East & Africa Fund.

Oliver, thanks for joining me.

Oliver Bell: Pleasure.

Cook: So, the Middle East and Africa, a huge area of investment, very interesting, but often in the news. What are the kind of key themes to investing there, for you?

Bell: I think what is very interesting is what you see on the news is just bad news, whereas in fact there is an awful lot of good news that is gone on over the last few years, the last decade really. And if you look at the characteristics of the markets today, there is very similar characteristics to the emerging markets of the late '90s.

So the macro stability, you have got much less civil war, very little war actually across 65 countries and then you've got better governance of the economy. So, in fact, you've got these ingredients that are really giving companies a really good foundation for growth.

Cook: You mentioned that there are 65 countries, are there particular countries that stand out for you? Or is it really about picking the stocks across the region?

Bell: We try to pick the stocks, but clearly there are some big countries that have bigger opportunities or perhaps are in a better space at any certain time. So, you can segment the whole region perhaps into four.

You've got the GCC, which is the Gulf Cooperation Council, which is just oil revenues and very strong, smaller populations, very strong economies.

You've got North Africa, which obviously had its problems in the last two or three years in terms of Arab Spring, but in fact a lot of the reasons for the Arab Spring are starting to mitigate and get better.

You've got Sub-Saharan Africa, which is really the engine of growth across Africa where you're seeing perhaps the biggest change.

And you've got South Africa at the bottom, which is sort of more of an emerging market, more of a developed market, but again has its own characteristics that are quite appealing.

Cook: And so what would be the main risks for you? Is it the political instability that we hear about on the news or is there something more to it?

Bell: I think the point is actually if you look across the 65 countries the political instability is affecting 4 or 5 countries. So there is very little. If you get back to the '70s, two-thirds of this continent had problems politically. Now what you are starting to see is a changeover of governments peacefully, through democracy, and as you get more and more swings from one side to the other peacefully, then you can actually suggest that stability is there for the long-term and actually then that gives the foundation again for economic growth.

Cook: And so with that stability for the long term as you mentioned, is this really an area of investment that you need to take as sort of five-plus year view, for example?

Bell: I think so. I think we have to accept this is like the emerging markets of the '90s where you will get booms and busts, and you have got to accept that. I think if you take the long-term view, the trajectory is clearly up, but you're going to have road humps along the way.

Cook: And emerging markets have been a sort of key ingredient of investors' portfolios for quite some time. Middle East and Africa perhaps is something that the people tend to think they're sort of frontier markets or something that they need to be a little bit more way of. Do you think that this area deserves a permanent position in a long-term portfolio?

Bell: Well, I think if you look at emerging markets today, if you strip out China and perhaps India, then the growth, the underlying growth of the economies is actually not that dissimilar from the developed markets. And then you shift to look at the next step, which is the next range of countries that are all growing 6% to 8%, which are these frontier markets you're talking about across Africa, across the Middle East and further afield. And that really is where the growth for the next decade probably is when you think of the whole emerging markets.

Cook: Oliver Bell, T. Rowe Price, thank you very much for explaining that to us. For Morningstar, I'm Holly Cook. Thanks for watching.

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