Africa’s Frontier Markets: Limited Information, Substantial Opportunity


Africa has more countries in the S&P/IFC Global Frontier Markets Index than any other continent, and as investor interest in the frontier markets has grown, fund flows to Africa have increased apace. According to EPFR, which tracks global fund flows, Africa regional funds have taken in $265m of net inflows YTD, while inflows into the Middle East & Africa funds that EPFR tracks have now exceeded $1 billion. As investors are increasing their positions in African companies, Africa’s financial information infrastructure has improved considerably. Yet some challenges remain for money managers that are seeking reliable research and data on Africa’s frontier markets.

Africa’s Appeal

Historically regarded as corrupt and politically unstable, Africa’s frontier markets have gained newfound interest among money managers in recent years. Some of this interest is attributable to promising political developments. According to Freedom House, a non-governmental organization that tracks democratic processes around the world, the number of free democracies in Africa has increased from four to eleven over the past decade, and more than half of the remaining countries in the region are in the transition process toward full and free democracy. In a panel on “Sourcing and Structuring Opportunities in Africa” at the Hedge Funds World Global Opportunities Conference in New York (hosted by Terrapinn), sentiment on Africa’s political situation was cautiously optimistic.

Because of these developments (and other global macro factors), economic performance in Africa has been strong in recent years. According to Exotix, a brokerage firm that has extensive operations in the African markets, real GDP growth in Sub-Saharan Africa (ex South Africa) was 6.7% in 2007, up from 5.4% in 2006. With significant resource and mineral reserves, and a relatively cheap labor, there is cause to believe that Africa’s frontier markets could benefit substantially from increasing global demand for commodities (especially oil & gas) in the coming years. Already, many of the world’s leading powers—notably China and the EU—have developed trade deals with these countries.

In spite of strong growth and an improving political landscape, challenges to Africa’s political and economic development remain. Corruption and economic mismanagement are still problems in many of Africa’s frontier economies. In Rising Powers, Shrinking Planets, a new book on global energy issues, energy expert Michael Klare points out that revenues derived from resource development projects “typically line the pockets of well-connected government officials—often with no ‘trickle down’ effect whatsoever.” Even so, the macro picture for Africa has some promising qualities, which can explain the recent uptick in fund flows and investor interest in the region.

Financial Information in Africa’s Frontier Markets

As fund flows and investor interest have increased in recent years, Africa’s financial information infrastructure has improved considerably. “Global investment is driving higher standards in African corporate governance and disclosure,” said Clifford Quinsberry of Investment Frontiers Research, a consultancy that advises on investing in the frontier markets. Ashley Bendell, Associate Director of African Equities at Exotix, points out that many companies now adhere to GAAP accounting standards and submit to audits from international agencies.“Even so, corporate reporting and disclosure standards still lag many countries outside of Africa.” Bendell notes.

Another challenge for investors is the lack of standard research coverage on the Sub-Saharan economies (ex South Africa). Exotix, which provides fundamental and thematic research on approximately 250 companies in this region, is one of the few players with a comprehensive eye towards the frontier markets. “Some investment banks are writing research on the bigger names in the frontier markets,” said Bendell, “but none are looking across the market cap spectrum in the emerging African economies.”

There are signs, however, that coverage is improving. More and more, local brokers in the African frontier markets are providing structured research and information products, while some primary research firms are expanding their capabilities in the region. Coverage is still better on the more developed markets—i.e. South Africa, Egypt and Morocco—but in a few years, the frontier markets might not be so far behind.


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