Why all frontier market eyes are on Africa

With a return of 31.9% in dollar terms, the MSCI Frontier Markets Index achieved its highest gain in 10 years in 2017, continuing the theme of emerging markets outperforming their developed peers.

Why all frontier market eyes are on Africa

However, while much of this growth was driven by Argentina and Vietnam, Oliver Bell, portfolio manager of the T Rowe Price Frontier Markets Equity Fund, believes next year’s returns could increasingly come from African countries.

“The standout stories of 2017 included Argentina and Vietnam, where peaceful politics led to economically-friendly reform agendas, which fired up the engines of growth and investment,” Bell said.

Yet after being plagued by drought and economic stagnation last year, Bell said 2018 could be the year Africa returns to focus “for all the right reasons”.

“Positive news can travel fast across the Frontier universe – where small, positive changes can quickly lead to the unlocking of vast economic potential,” he said. “Our biggest wish of all this year is for the positive recent political developments in Africa to lead to a real reversal of economic fortunes,” he said.

While not a country in the Frontier Markets benchmark, Bell said the economic health of South Africa has ramifications for a large part of the vast continent.

“We witnessed with positive political developments in South Africa at the end of 2017, with the ruling African National Congress party electing business and market-friendly candidate Cyril Ramaphosa to be its next president. We have high hopes this will mark a reform inflection point and begin the unwinding of the alleged state capture presided over by President Jacob Zuma. Vitally, this would unlock billions of US dollars of investment by corporates, local pension and insurance funds.”

Ramaphosa is expected to unveil his plan of action in the coming weeks and Bell said he will look on with interest as to whether Zuma will see out his remaining two years as leader of the nation.

Indeed, good things may well come in pairs, with the positive development in South Africa unfolding just a month after President Robert Mugabe was ousted after 37 years as President of Zimbabwe.

“We welcome the change and hope to see fully free and fair elections this year, which would provide much needed legitimacy to the government,” Bell said. “This should also free up substantial investment dollars to re-invest and help re-establish the former ‘bread basket of Africa’. As investors in listed equities, we would welcome a return to what was previously one of the largest and most-liquid stock markets on the continent.”

As South Africa recovers, Bell said it will have a positive knock-on effect to neighbouring countries – such as Namibia, Botswana and Zambia. He noted these commodity producers have been benefitting from the recovery of the copper price, but added this tailwind must be cemented by final agreements of IMF deals – which have yet to be fully agreed.

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