LONDON (Bloomberg) — Frontier-market equities will outperform emerging-market stocks next year, led by gains in Middle Eastern shares, said HSBC Holdings Plc's Andrea Nannini, whose fund has more than doubled the benchmark index this year.

"The frontier markets will perform very well in 2010," said Nannini, who manages $150 million including the HSBC New Frontiers Fund, which has gained 47 percent in 2009. "The Middle East will lead the way, driving frontier markets higher. The rally may start as early as the fourth quarter this year."

The MSCI Frontier Markets Index has climbed 23 percent in 2009, trailing a 67 percent rally for MSCI Inc.'s benchmark emerging-markets gauge. The frontier index trades at nine times estimated earnings, while the MSCI Emerging Markets Index of 22 developing nations fetches 16 times estimated profit.

Frontier-market stocks should be trading "in line" with developing-nation equities, Nannini said in a telephone interview from London.

"Traditionally, frontier markets have traded in line or even a slight premium," Nannini said. He predicts frontier markets will outperform in the next three to nine months.

Nannini boosted his allocation for Middle Eastern stocks to 50 percent from 40 percent, saying that shares are "very cheap" and the region's equities will catch up with its global counterparts as corporate earnings improve. He recommends bank stocks in the United Arab Emirates and Nigeria and industrial companies in Eqypt.