Articles - Investing in Frontier Markets 2013


Emerging markets poor performance and disappointing earnings have thrust frontier markets forwards. For T.Rowe Price, Africa and the Middle East are the drivers behind this out performance with robust-top down fundamentals and impressive capital market liberalisation creating commodity windfalls, lowering debt and improving inflation rates.

 The ‘Investing in Frontier Markets’ produced by Clear Path Analysis in collaboration with T. Rowe Price brings together the International Finance Corporation, International Monetary Fund, European Commission, African Development Bank, Caribbean Development Bank and a number of global asset owners, including: RAILPEN, Blue Sky Group, Swedfund, AP1 and The Clwyd Pension Fund to discuss the long-term view.

 Saudi Arabia, Qatar, United Arab Emirates, Nigeria and South Africa are the favourites. As according to Oliver Bell, Portfolio Manager, T.Rowe Price, “[Africa and Middle East] is now forecast to grow annually at 5% on average for the next five years. A huge debt relief programme in Africa has also helped bring debt-to-GDP ratios to manageable levels, dropping to 20%.”

 He expands: “…the region is set to have the world’s largest workforce by 2040. Most tellingly, foreign investment is pouring into the region, with China contributing US$100 billion from 2005 to 2010….”

 For Bell, East Africa is an investor’s gem with oil discoveries in Uganda (3½ billion barrels in Lake Albert) and Kenya, alongside gas discoveries in Tanzania and Mozambique. Significantly “…the 14th poorest country globally, Mozambique has so far found 125 trillion cubic feet (tcf) of commercial gas, which is more than Australia’s 103tcf of reserves.”

 Such investment “across 4 countries in Eastern Africa encompassing a population of 130 million people has the ability to be transformational”, states Bell.

 Political instability commonly holds investors back but for Richard Fox, Head, Middle East and Africa Sovereigns, Fitch Ratings, there is less emphasis on this World Bank classification, as “the Arab Spring taught us that countries which appear to be politically stable, such as Libya and Egypt, are often the ones with hidden problems.”

 For example, despite the turmoil, “Egypt has the potential for growth and therefore, continues to be of particular interest to the Gulf Cooperation Council (GCC) countries who have a far better understanding of the risks….”

 Governance remains key for investment protection in pre-emergent markets and for Frank Curtiss, Head of Corporate Governance, RAILPEN Investments, working with on-the-ground investor groups to see the ‘whites of their eyes’ is imperative, as “…poor governance often leads to questionable data and {..} an independent board that really exists, rather than just nominally, is key.”

 Timely allocation is crucial if populous balance sheets are to be capitalised on; particularly as “...changes in investors risk aversion or in global liquidity conditions may occur rather abruptly”, Mauro Mecagni, Assistant Director, African Department, International Monetary Fund (IMF),

 Low correlations with emerging and developed markets, enables frontier markets to bring diversification to a portfolio. But the extent to which liquidity should dictate asset allocation is blurred. As Fredrik Törgren, Head of Private Equity Funds, Swedfund, cites, “[In} Africa you see that probably 80% of the market capitalisation is related to South Africa; however, this does not tell us how private equity markets in Africa are focusing their investments.”

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