As reported in The Wall Street Journal, “frontier markets” are up nearly 100% or more in dollar terms, according to a Standard & Poor’s index.  As the article notes, such markets – despite their small size and often poor infrastructure – are attracting increasing attention:

“…Nigeria, has even outpaced China during the past 12 months, S&P says, with returns of 111% for dollar-based investors. In Kenya, some investors say the coming listing of a chunk of Safaricom Ltd., a telecom operator, might give the company a market value of as much as $4 billion, a large amount for that type of market.

…Bigger and better-known developing markets such as India and China are famous for their rapid economic growth, but a similar process is also unfolding in many out-of-the-way markets. The countries of sub-Saharan Africa, for instance, are projected to grow 6.8% in 2008, according to the International Monetary Fund, while Kazakhstan is set to expand by nearly 8%. Booming commodity prices, growing investment, and efforts to rein in debt have contributed to the rosier picture.

…Investment managers particularly like lesser-known markets in the Middle East, including the United Arab Emirates, Kuwait, and Qatar, as well as countries such as Ghana in Africa.

…These markets come with particular challenges, from regulatory hurdles to political instability to a dearth of actively traded stocks. In Botswana, for instance, on Thursday, less than a third of the companies listed on the stock exchange had shares traded. Sometimes, in order to buy a larger block of shares, foreign investors have to wait for local banks or insurance companies to rebalance their portfolios, at which point they pick up their holdings in local firms.

Add to these issues a bigger one: Some of the markets are no longer cheap. Stocks in places such as Bulgaria, Romania and Bangladesh are considerably more expensive on a price-to-earnings basis than those in the U.S. Shares in Vietnam, one of the first frontier markets to rocket upward, now trade at 96 times the prior year’s earnings.

…Investors have another reason to look closely. Countries on the frontier are often less connected to stock gyrations and economic turns in the developed world. That is appealing in a world where global investments are increasingly intertwined, making it harder to diversify your bets.

Investors based in Botswana “couldn’t care less if Ben Bernanke lowers interest rates,” says John Niepold, who manages about $2 billion in African and Middle Eastern stocks at Emerging Markets Management in Arlington, Va….”