Frontier markets, which have been battered in some cases even more severely than mainstream economies in the West and elsewhere, have potential to rise rapidly in any subsequent recovery, aided in part by attractive valuations, says Citigroup.

These markets, which are relatively young and generally too small and illiquid to warrant membership of major emerging market indices, currently remain at about 50 per cent or more below their highs set in 2007-8, according to the bank. In March 2009, the MSCI Frontier Markets Index had fallen by 70 per cent from its peak in late 2007. But a recovery in factors such as commodity prices and stimulative government policy will help these economies to recover, it said.

On a valuation basis, frontier markets are relatively cheap: the MSCI index, which now covers 20 national markets – have a trailing price-to-earnings ratio of 13.1 times earnings, well below the MSCI Emerging Markets p/e multiple of 20 times, says Citigroup.

“In the past, small, developing equity markets have tended do well as the market cycle matures. An environment of prolonged low global interest rates bodes well for another period of outperformance from these liquid markets,” the bank said.

Citigroup says its favourite frontier markets are Kazakhstan, Nigeria and Croatia. Its ranking model of other countries highlights Estonia, Serbia and Kenya as attractive. Among the less attractive countries, Citigroup says, are Vietnam, Jordan and Ukraine.

Populations of these “frontier” economies vary enormously, as Citigroup data shows. At one end of the scale is Nigeria, with a population of 145 million, while at the lowest end is Mauritius, at 1.26 million.