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SHIFTING TREND TOWARDS FRONTIER MARKETS

Updated: Jun 4, 2018

Anthony Campbell argues that emerging markets are structurally important and growth rates are not just a short term phenomena


The requirements for portfolio diversification amongst investors has increased simultaneously with the ever shifting focus towards frontier and emerging markets. According to Dr Slim Feriani, the start of the new century proved to be a turning point in the global economy and the beginning of a new structural trend.


The past decade was the worst for Wall Street since the 1930s; the S&P 500 lost 24.1% in sterling terms, which was worse than the FTSE 100 (-14.8%) and MSCI World (-17.7 %). In contrast, the MSCI Emerging Markets Index returned 102.3%. This was despite the fact the decade included the aftermath of the Asian crisis and Russian default, the bursting of the technology bubble in 2000, the Argentinean crisis in 2001, September 11, the Iraq War and SARS, not forgetting the sub-prime crisis and bear market of 2007-2009 (when two thirds of the EM index was wiped out). The subprime economic and financial crisis in developed countries acted as a catalyst accelerating structural change. Indeed, the balance of economic, financial and political power has already shifted significantly in favour of Emerging markets, with China in the driving seat. (Dr Slim Feriani IFA https://www.professionaladviser.com/professional-adviser/feature/1687522/slim-feriani-emerging-markets Article Published 24th June 2010)


The African markets have been affected by this structural change. According to research produced by Deutsche Bank which probed into the sustainability of the emergence of frontier markets within Africa, several factors are likely to help the African frontier markets to gain increasing importance in the financial map of the world. Sub-Saharan Africa is endowed with a large share of the world’s natural resources. 5% of the world’s proven oil reserves (Nigeria, Angola, Sudan, Gabon, Equatorial Guinea), 4% of the world’s proven gas reserves (Nigeria), 60% of the world’s diamond reserves (Democratic Republic of Congo, Botswana, South Africa), 20% of the world’s gold reserves (South Africa, Ghana), 49% of the world’s cobalt reserves (Congo and Zambia) and 3.4% of the world’s copper reserves (Zambia) are located in this region of the world.


Finally, structural advances over the last few years such as debt relief, improvements in the business environment and the use of new information and communication technologies are supportive of medium-term economic growth and thus set the stage for further capital-market development. An increasing number of stock exchanges (for example Angola), new external bond issuance (for example Kenya, Tanzania, Zambia, Uganda and Nigeria), growing government financing needs and increased primary-market activity are supply-side factors that will boost the Sub-Saharan capital markets. On the demand side, the increasing importance of local institutional investors with a long-term investment horizon (in particular pension funds in Nigeria and Botswana) will lead to the issuance of longer-dated securities. Another important demand-side driver of the capital-markets development will be the wealth of the African Diaspora, which has started to flow into sub-Saharan Africa over the last few years.(Deutsche Bank Research: Author: Marion Muehlberger: African Frontier Capital Markets More Than A Flash in The Pan) .

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