A continent in midst of ‘seismic shift’

A spectacular increase in global flows into Africa and Middle East funds supports experts’ view that the economic balance of power is shifting as “frontier economies” increasingly drive growth.

The centre of economic gravity is shifting eastwards and southwards with “huge consequences” for the world we live in, according to John Battersby, the UK country manager for the International Marketing Council of South Africa. Speaking after a May international media forum in Johannesburg, Battersby said the global power balance was changing: emerging countries were more rightly called “high growth”.

Africa’s economic fortunes are tightly wound into this dynamic. And an increasing number of foreign investors are taking note, according to figures from EPFR Global, which tracks global fund flows and asset allocation data. This includes Africa regional equity funds of about $2.2 billion (£1.3 billion) and Middle East & Africa funds of about $3.8 billion. By September this year, EPFR says these two groups had attracted $1.8 billion in net flows against only $700m last year, $30m in 2006, $80m in 2005 and outflows in 2004.

Brad Durham, the managing director of EPFR Global, says high commodity prices, government reform efforts, relatively strong GDP growth in many major markets and infrastructure investments from China have helped boost interest. “Also important in the last year or two is Africa’s placement in the emerging frontier markets asset class, which investors have gravitated [towards], since frontier markets’ equity per- formance is mainly uncorrelated with global equity markets, other emerging mar- kets, and even themselves.”

This appeal is understandable, given the moderation in global growth. The World Bank Global Development Finance report published in June projects sub-Saharan growth at 6.3% for 2008 and 5.6% for 2009. This is relative to global growth projections of 2.7% and 3.0% respectively. Durham expects growth of 6-7% in Africa this year, putting the region just behind Asia and the Gulf markets in terms of economic growth trajectory. He adds: “In a world with so much fallout from the global credit crisis, finding countries to invest in away from the madding crowd are valuable to investors, which is why we have seen inflows into the region this year amid massive fund outflows from developed markets and major emerging market equity funds.”

The telecoms sector in Africa is regarded as the fastest growing in the world. Initial public offerings for Kenya’s Safricom and Celtel in Zambia have been “wildly successful”, says Durham. “Financials are also attractive given their low exposure to the global credit mess.”

But the bulk of the Africa story is the strong global appetite for its commodities. SABMiller’s 2008 annual report shows the double-edged nature of this boom: while it has helped increase demand for the company’s products in commodity-producing countries, it has added sharp increases in the price of barley and hops. Transport, glass and aluminium are all more expensive after the oil price hikes.

This suits oil exporters like Angola: rapidly growing output from new oilfields sustained double-digit GDP growth of 22.4% in 2007, according to Standard Bank figures. Angola has invested heavily in infrastructure, particularly rail and road, following a 2002 political ceasefire agreement. Nigeria, an oil exporter, is also sitting pretty; although like South Africa it has had energy supply problems, Nigeria has made strides in government reform and regulatory improvements.

Durham says other countries high on the investment radar include Egypt, with its exposure to the “red-hot Mena markets” (Middle East and North Africa) and 7% growth owing to large foreign and domestic investment. Kenya’s sustainable economic growth, on the back of a sizable private sector, remains attractive despite political unrest in early 2008. And he says Ghana is also attracting investors, with its equity market holding up better than most African markets this year.

But the flip side of this boom is that net oil importers are being squeezed. This is reflected in South Africa by a soaring trade deficit, most recently pegged at 7.3% of GDP.

The biggest growth handbrake for the region at present is food and fuel price inflation, a global problem that has sparked public protests in Cameroon, Ivory Coast, Kenya, Morocco, Mozambique, Senegal and South Africa. Trevor Manuel, South Africa’s finance minister, told a Johannesburg economic forum in August that while rising prices benefit net producers they hit the poor the hardest: “Price stability matters to people on fixed incomes.” South Africa has responded by tightening its monetary policy: interest rates were raised by half a point in both April and June, levelling at 12% in July.

Given the weak links between monetary policy and inflation rate, this can only help around the margins, says Citibank. The bank advocates African countries allow some exchange rate appreciation – as Nigeria and Angola have experienced this year – to help combat price inflation.

Looking ahead, one of the United Nations’ Millennium Development Goals is to halve the proportion of people living in poverty by 2015. But Stephen Gelb, the executive director of South Africa’s The Edge Institute, told a Johannesburg economic forum in August that inequality needed more attention.

What is clear is that “a seismic shift” is underway, according to Stephen Jennings, the chief executive officer of Renaissance Group. He told the group’s annual investors conference held in Moscow in June that the world’s new economies will drive global growth and value creation.

What does this mean for fund managers? For one thing, Durham expects portfolios to get “a lot more exotic”. In addition, emerging market weightings in global equity funds will continue to rise, funds mandated to invest globally will need expanded research capacity, and new product development opportunities will increase. He adds: “The development of frontier markets into a fully fledged asset class will also mean global fund managers investing substantially in these markets will be firmly on the radar of institutional investors to move money into uncorrelated asset classes.”