London-based fund-of-fund manager Advance Emerging Capital expects demand for emerging and frontier market investment strategies to increase in the next six to 12 months.
"There may be not many investments in the short term, but over the next six to 12 months we think it will be the case," Advance Emerging Capital chief executive and chief investment officer Slim Feriani said.
"[Investors] don't want to touch equities these days. Everybody seems happy to get negative returns on bonds; that is the kind of irrational behaviour in the market.
"[But] we don't think it will take a lot to get markets moving."
Feriani said the current climate of risk aversion made it difficult to get investors interested in frontier markets.
"It is not easy to sell. It is a good environment for bears and sceptics to get air time," he said.
"But it is easier than 15 years ago, when you had crises everywhere: in Argentina, Brazil and Russia. They were called 'Mickey Mouse' economies back then. And they were different economies, they were much smaller."
He said the valuations of these growth markets were currently very low.
"We are now at depressed valuations. At these kind of valuations we are talking about forward price-to-earnings multiples for the emerging markets of just over eight times, and for frontier markets it is 7.5 [times]," he said.
"These valuations are extremely attractive; it is reflecting market risk aversion right now.
"We think it is a no-brainer for anyone to allocate some money to this asset class.
"We're not saying: 'put all your eggs in one basket', but part of anyone's savings should be allocated to this market, which is the only market to have growth."
Advance Emerging Capital invests in 80 fund managers across 27 countries, and Feriani said the best opportunities were in Africa and the Middle East.
"We are staying away from North Africa because of the Arab Spring. We want to see how that plays out," he said.
"But we see opportunities in countries like Nigeria, Zambia and Kenya, even Zimbabwe is interesting.
"We also like to be contrarian about Argentina. It is a distressed market but over the long term they deserve some allocation."
The growth of these markets is increasingly driven by the growth of domestic demand.
"Emerging markets used to be a cyclical play; they had a large export sector. But now we see the growing importance of the domestic engine. We prefer the domestic engine because of the fragile global economy," Feriani said.
Institutional investors had increasingly become important players in emerging markets, the International Organization of Securities Commissions (IOSCO) said last week.
But for stable markets to develop, those markets required further development of market mechanisms and oversight, IOSCO said.
It recommended the introduction of market-making mechanisms.
"Financial instruments that are less followed by analysts and investors are thinly traded. It is very difficult for institutional investors to buy and sell such instruments with meaningful size," it said in a report.
"Introducing market-making mechanisms would narrow the bid/ask spread and make large volume transactions possible for institutional investors."
It also recommended broadening the price fluctuation band to reduce volatility and lower transaction costs to improve market liquidity.
