Investing in frontier markets, sometimes called “emerging emerging markets”, is no longer in vogue – which some believe provides a good opportunity to buy cheaply.

While cash has flowed into larger emerging markets this year, frontier markets have yet to see the big foreign investors return.

Mark Mobius, manager of the Templeton Emerging Markets Investment Trust and an emerging markets specialist, said last week that frontier markets “are looking interesting and could become tomorrow’s emerging markets”.

Frontier markets have lagged both emerging and developed markets this year, although they have risen since the lows in March. Analysts attribute this to hedge funds continuing to deleverage and wary investors staying away from markets that are deemed riskier.

But specialists say this reticence could provide good opportunities. Slim Feriani, manager of the Advance Frontier Markets investment trust, says that in the event of another economic shock, frontier markets should come off less badly.

A lack of cash from foreign investors also means that valuations are very attractive – with some markets, such as Kazakhstan, trading on price/earnings ratios of just four times. The average price/earnings ratio on the MSCI frontier index this year is 10 times, compared with 15 times on the emerging market index.

The potential for frontier markets to grow fast is another reason why investors like them. Qatar’s GDP grew 15 per cent last year and it is expected to maintain this rate this year and next.

“The growth and valuation metrics of all these frontier markets are amazing – they have hockey stick projections,” says Jason Manolopoulos, who runs the Dromeus Global Opportunities fund, focusing on fixed income investments in emerging markets.

There is no accepted definition of a frontier market and some debate over whether larger “frontier” markets – such as Ukraine, Chile and Indonesia – should now be classed as emerging. Feriani is willing to invest in bigger frontier markets such as Morocco, which is listed on the MSCI emerging markets index.

Manolopoulos is more of a purist. “For me, it depends on the ease of entry and exit into the local market,” he says. On that basis, Kazakhstan, Ukraine and Chile are “normal”, while Uzbekistan and Kyrgyzstan are still frontier markets. In Uzbekistan, for example, foreign investors can only access their money by physically going to a branch of a local bank.

In general, frontier markets are classed as those where stocks are very illiquid and under-researched, offering the potential to exploit valuation anomalies. “You won’t find many research notes on Tunisia and that presents an opportunity,” says Feriani.

Frontier markets tend to be dominated by banks and financial stocks, as they are normally the first companies to be privatised. Consumer companies such as breweries also do well, while construction companies are growing rapidly thanks to demand for new housing from the emerging middle classes.

“The key common denominator across all these countries is that they are coming out of economic obscurity and have a middle class that wants Coca-Cola, mobile phones, cars and a house,” says Feriani.

Feriani also argues that frontier markets are historically uncorrelated with other equity markets, although this has not been the case in the past 18 months. Emerging markets are now also far more correlated with developed markets than they used to be.

“Emerging markets have now grown up and many are much more cash rich and, in some senses, more prudent,” says Michael O’Sullivan, global head of asset allocation at Credit Suisse’s private banking business. “The idea behind frontier markets is that they are the next emerging markets.” His favoured frontier markets are Ukraine, Ghana and Peru.

But governments are likely to be volatile and legal systems may not be robust – which can create uncertainty over the ownership of assets for foreign investors. For this reason, investors often try to go in on the coat tails of multinationals and become joint shareholders in a company or venture, to mitigate the regulatory risk.

Even so, frontier markets are only recommended for those in for the long haul. “You have a lot of asset price growth in the future – but it might take 20 to 30 years to achieve it,” says Manolopoulos.

It is also difficult for retail investors to gain exposure to frontier markets. Killik & Co, the broker, recommends Feriani’s investment trust. It also likes Epicure Qatar Equity Opportunities, an Aim-listed closed-end fund – which trades on a discount of about 15 per cent.