Africa’s fron­tier mar­kets

Finweek English Edition - - COMPANIES & INVESTMENTS - Jessica Hub­bard Ge­ogra­phies To­tal GDP 2012 ($bn) To­tal Pop­u­la­tion 2012 (Mil­lions) Fore­cast An­nual Real GDP Growth: 2013-2017 (%)

With growth in the on­ce­fash­ion­able emerg­ing mar­kets now ta­per­ing off fast, in­vestors – and par­tic­u­larly those with a healthy ap­petite for risk – are feel­ing around for the next phe­nom­e­non. Many think they have al­ready found it, in the form of fron­tier or ‘pre-emerg­ing’ mar­kets.

Al­ready, sig­nif­i­cant funds are f low­ing in their di­rec­tion, with data provider EPFR re­veal­ing that money chan­neled into fron­tier mar­ket eq­uity funds reached an im­pres­sive $2.27bn for the 12 months to end May. The MSCI Fron­tier Mar­ket in­dex, for one, gained over 13% in the first five months of 2013, which ac­cord­ing to FT.com, is its best per­for­mance for the year to date since the in­dex was es­tab­lished five years ago.

Some of the most favoured fron­tier mar­kets in­clude Bul­garia, the UAE, Sri Lanka, Nige­ria, Pak­istan and Viet­nam, yet not ev­ery­one agrees on what ex­actly clas­sif ies a mar­ket as ‘ fron­tier’ – with in­dexes vary­ing in the coun­tries they track. Gen­er­ally, how­ever, its stock mar­ket would be far less es­tab­lished than those of its emerg­ing-mar­ket coun­ter­parts, and would likely pose a num­ber of risks (poor liq­uid­ity, lax reg­u­la­tion, sub­stan­dard fi­nan­cial re­port­ing, ma­jor cur­rency f l uct ua­tions, etc). Yet many in­vestors are at­tracted by the fact that fron­tier mar­ket in­vest­ments usu­ally have a low cor­re­la­tion to de­vel­oped mar­kets – which of­fers some use­ful di­ver­si­fi­ca­tion to eq­uity port­fo­lios.

Un­sur­pris­ingly, be­cause of its young pop­u­la­tions, swelling mid­dle-class sec­tors and rapid all-round de­vel­op­ment, sub­Sa­ha­ran Africa is prov­ing to be a hot­bed for the emer­gence of th­ese in­creas­ingly se­duc­tive fron­tier mar­kets. Euromon­i­tor In­ter­na­tional, a mar­ket re­searcher, has iden­ti­fied f ive African fron­tier economies: Kenya, Ethiopia, Ghana, Tan­za­nia and Cameroon.

“De­spite risks, th­ese fron­tier mar­kets will of­fer at­trac­tive long-term in­vest­ment po­ten­tial as their economies de­velop from a low base, out­per­form­ing many stag­nant, cri­sis-hit ad­vanced economies,” ex­plains Me­dia Egh­bal, Coun­try In­sight Man­ag­ing Edi­tor at Euromon­i­tor. In­deed, when tak­ing a closer look at some of th­ese mar­kets, one be­gins to see the po­ten­tial – par­tic­u­larly when com­par­ing them to the fi­nan­cial disas­ter zones lit­ter­ing Europe and else­where. Ethiopia, for ex­am­ple, has ex­pe­ri­enced sub-Sa­ha­ran Africa’s fastest aver­age an­nual real GDP growth over 2007-2012 (8.7%), ac­cord­ing to Euromon­i­tor, while it has the sec­ond largest pop­u­la­tion in the re­gion (be­hind Nige­ria). “Ethiopia has ben­e­fit­ted from no­table poverty re­duc­tion and made strides to­wards meet­ing the Mil­len­nium De­vel­op­ment Goals (al­though per capita in­comes re­main low),” says Egh­bal. “The coun­try has strong po­ten­tial for hy­dro and wind power and the govern­ment is tar­get­ing ac­ces­sion to the World Trade Or­gan­i­sa­tion.”

Ghana, long a bea­con of sta­bil­ity on the con­ti­nent, re­cently be­come an oil pro­ducer, which bodes well for growth in the medium and long term. In ad­di­tion, the coun­try ranked 64th out of 185 in the World Bank’s Ease of Do­ing Busi­ness In­dex, mak­ing it the fifth eas­i­est coun­try to do busi­ness in sub-Sa­ha­ran Africa. Per­haps one of the more un­ex­pected and def­i­nitely less known of the five mar­kets, Cameroon, is par­tic­u­larly in­ter­est­ing. The coun­try re­lies on agri­cul­ture, con­struc­tion and ser­vices to keep things tick­ing along, with ser­vices mak­ing up an un­healthy 46.8% of GDP in 2012.

“Ex­port mar­ket di­ver­si­fi­ca­tion is also needed as 46% of ex­ports went to Europe in 2012,” ex­plains Egh­bal. “Yet Cameroon ben­e­fits from sta­ble pol­i­tics, and a young and grow­ing pop­u­la­tion which could in­ject op­por­tu­ni­ties into labour and con­sumer mar­ket de­vel­op­ment.” She adds that Cameroon has an am­bi­tious tar­get to be­come an up­per mid­dle-in­come coun­try by 2035.

For in­vestors who are look­ing for some­thing a lit­tle bit dif­fer­ent, and def­i­nitely more spicy than the usual sus­pects in Europe, Asia and North Amer­ica, f lirt­ing with Africa’s fron­tier mar­kets will at the very least get the old heart pump­ing again. To­tal GDP, Pop­u­la­tion and Real GDP Growth in Se­lected

African Economies: 2013-2017

41

41

39.2

27.9

26.2

43

86.5

25.5

47.7

20.4

6.2

6.5

6.4

7.0

5.6

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