Emerging and frontier markets’ share of global GDP is now 35.2%
London: Pension fund managers remain positive about opportunities in frontier markets despite the recent political turmoil and instability in the Middle East and North Africa region. The diverse investment opportunities offered by these markets are fast becoming a major incentive for managers and their investors as they become more comfortable with the risk return characteristics presented by frontier regions.
According to the latest research from Clear Path Analysis, fund managers are highly optimistic about the investment potential in further afield frontier markets as asset owners increasingly seek diversification away from developed regions. Africa has emerged from the financial crisis as one of the few regions to have avoided the fallout of the economic downturn and the ongoing Euro zone problems and it is continuing to generate significant investment prospects amongst its frontier markets.
Yet, with such concerns at the forefront of manager’s minds, the ‘Frontier Markets’ report by Clear Path Analysis, seeks to uncover the high value opportunities to which a significant number of western investors appear oblivious.
Kemal Ahmed, Portfolio Manager of the Emerging & Frontier Markets Equity Strategy at Investec Asset Management states that: “The world is witnessing a historic shift as the emerging and frontier markets evolve into an economic power likely to rival the developed markets during this century.”
Recent figures based on the IMF World Economic Outlook of 2011 show: “The emerging and frontier markets’ share of global GDP (in USD terms) is already 35.2% and on a purchasing power parity basis is almost 50.0%. There is growing recognition on the part of investors that exposure to the emerging and frontier markets must increase and it is likely that allocations will shift by substantial amounts in the coming years.”
This is the case despite figures that suggest 78% of pension fund managers are tentative on allocations to frontier economies, thanks mainly to the perceived risks created by the ‘Arab Spring’ uprisings. There remains a lack of awareness surrounding frontier investment, as a recent study by the Financial Times found that over 95% of UK institutional investors were unaware of investment opportunities in Africa.
Not all managers would agree that frontier market investment uncertainty is widespread. Somdatt Kurdikar, Head, International at Harith Fund Managers, states: “The African opportunity is now widely understood. With a clear thematic trend of continued growth under-pinned by democratisation process and structural reforms now firmly underway, it is no surprise that a number of countries in Africa are poised for strong economic growth.”
He points out that understanding the local environment is key: “What is clear is that to navigate these geographies, investors should have vehicles which are on-the-ground so as to be proactive and real-time in monitoring investments; have the ability to structure and de-risk projects by having strong sponsors and credible stake-holders. Last but not the least, have a regional exposure across the continent in order to avoid any single or indeed sub-regional concentration of exposure.”
In light of the recent regional instability, Kurdikar reinforces how local expertise has been vital to successful investing: “With investment in infrastructure, it is crucial to have highly skilled partners by your side, development, financing, construction or operation, strong regional capability is of fundamental importance. Having established players in the region such as the IFC and the African Development Bank can bring a wealth of credibility, integrity and significant experience to the situation as well as composure and focus in times of adversity.”
Political developments, most notably those which originate from the uncertainty in North Africa have certainly had an impact upon the cautiously optimistic approach of some managers.
However Chris Derksen, Head of Frontier Markets at Investec Asset Management points out that: “Despite a year of political upheaval in North Africa, a number of the most significant markets on the continent have turned a historic corner over the past decade in terms of their politics. We expect this trend towards greater political stability, accountable leadership and predictable policymaking in Africa to continue.”
The political developments of the last year are a key driver shaping the investment outlook in frontier regions explains Derksen: “Against this backdrop, there is a strong case that investment in these markets, particularly in companies focused on domestic demand in a universe of countries underpinned by healthier balance sheets, demographics, a rapidly growing middle class and rising urbanization, suggest more attractive long term returns and enhancing the already immense investment potential of the continent.”
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