High net worth individuals, particularly Indian residents and non-resident Indians, are re-discovering their risk appetite and piling into this year’s hot story, frontier markets.

A recent Morgan Stanley report has resonated strongly with wealthy Indians, who are familiar and have strong links with some of the frontier markets of the moment, such as Nigeria and Kenya, where markets have risen by around 20 per cent this year. Despite the risks, the Nigerian banking sector is seen as particularly attractive.

“Frontier markets are sitting squarely in the sweet spot, featuring all the elements that we seek when looking for equity markets poised to potentially deliver strong performance,” the Morgan Stanley report said. (Citigroup made a similarly optimistic report about frontier markets in February, as reported here).

The 12-month average trailing price to earnings ratio for frontier markets was 14.5 times, compared to a PE of 20.6 for the MSCI emerging markets index. The MSCI Frontier Market index has risen by nearly 7 per cent so far this year compared to 0.3 for the emerging market index. Emerging markets are seen by many fund managers as overpriced after the rapid gains of 2009.

There is also an interest rate differential for investors in frontier markets: investors are able to borrow money at lower interest rates in their home markets and invest in market with high yielding currencies.

Net inflows to frontier markets were $187 million in the year to 10 March, compared with outflows last year, according to EPFR Global. Last year there were net outflows.

In the Pakistan market, for example, a recent record was set when foreigners pumped $14 million into the equity market in a single day, after injecting a total of $78 million in the previous two weeks.

Other frontier markets which are in vogue include the Ukraine, Estonia, Sri Lanka and Bangladesh. The Gulf states are also finding favour: the United Arab Emirates and Qatar are popular, notwithstanding the heavy debt problems of neighbouring Dubai.

“There is so much upside in these markets and Indian investors are in quite a confident mood,” a broker in Mumbai told WealthbriefingAsia, who declined to be named.

“Many have bought the global recovery story and are happy with these sort of risks,” the broker said.