Kenya, Nigeria, Ghana, along with other emerging markets in Africa, Asia, South America, Middle East and Eastern Europe are what investors call frontier markets. But Africa is where frontier markets fund managers are showing high optimism. These markets are not for the faint hearted. They hold high risks and are also highly illiquid, but they offer investors very attractive returns. In 2011 for example the Nairobi Stock Exchange had a bad run that saw its All-Share index fall 30.6% due to rising inflation and a currency crisis that led local investors to flee the market. However, several frontier market investors pumped investments into the Kenya market, turned the tide around and were soon in the money.
In Nigeria, reforms by the country’s Security Exchanges Commission (SEC) following major financial scandals and irregularities in the past have instituted strong governance structures and restored investor confidence. The Nigerian Stock Exchange has grown, and is in fact one of the best performing stock markets in Africa. The Nigerian All Share Index (ASI) for example closed the month of July with an appreciation of 6.8% over the previous month with the ASI growing from 21,599.57 at beginning of July to 23,061.38 by the end of the month. By the end of July, the year to date (YTD) growth of the NSE was at 11.2%.
Zimbabwe is another one of the major frontier markets in Africa. Many might associate Zimbabwe with its runaway inflation of the recent past but the country’s equity market is now yielding one of the best returns for investors.
So what are the attractions of these new markets? The biggest attraction is certainly the growth potential of African economies. The African lions are on the move and outside South Africa, many of the African economies are showing impressive expansion. The United Nations Development Program (UNDP) predicts that Africa could grow by up to 7 percent by 2015, fueled by a rush of investors attracted by its drive to improve its infrastructure. While many investors are focused on the MSCI Frontier Markets Index countries that include Kenya, Botswana, Ghana, Mauritius, Nigeria, Tunisia and Zimbabwe, some are taking risks beyond these countries, and entering markets like Uganda, Tanzania, Namibia and Mozambique, amongst others. These markets though riskier could yield higher growth potentials.
As African companies continue to establish deep roots combined with world-class management processes, they become attractive options for foreign investors. The continued growth of the African middle class also means the prospects for consumer oriented stocks will continue to be brighter in the coming years in spite of challenges. Those with brave hearts and the patience to plough into long-term investments could stand to realize great returns.
Otto Abasi Williams. Email: otto@africafinancedaily.com
