Africa’s frontier markets
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