Africa outperforms frontier markets
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Oliver Bell is the lead portfolio manager of T Rowe Price, a global investment manager. This article was originally published on the Morningstar UK website.
Structural reforms and strong economic growth are fuelling equity outperformance and attracting increasing investor interest in the Africa and Middle East region.
Despite the fact the region's average performance lagged frontier markets in 2013, mainly due to weakness in South Africa, the region outperformed in each of the prior four years.
Africa, for example, has been one of the world's fastest-growing regions in the last decade, with the International Monetary Fund predicting it will account for seven of the world's 10 fastest-growing economies from 2011 to 2015.
Africa is at a stage of growth and development similar to Asia and Latin America in the mid-1990s.
The region is transforming faster than anyone realises, as the single biggest upside for Africa is the huge gap between investor perception and the reality.
Companies, for example, are growing rapidly, and the political situation on the ground is vastly better. As that gap closes, people will look at these companies in a very different light.
There is also a reduction in armed conflicts across Africa as democracy takes hold. As way of example, fifty of the 54 African countries have held elections in the past three years.
With this improving stability, coupled with progress in rooting out corruption, Africa is attracting more foreign investment and boosting economies.
Overall, the region offers better governance, more attractive demographics with the world's youngest population, rising urbanisation, infrastructure investment, and a strong asset base in natural resources. New oil-and-gas discoveries in East Africa are an added bonus.
Mozambique, for example, one of the world's poorest countries, has discovered more commercial gas than exists in Australia. Tanzania is also sitting on large gas reserves, while Kenya's oil reserves are about the same size as those in the North Sea.
Another misperception concerns the quality of management, which has improved as educated Africans are beginning to return from abroad for opportunities at home.
One of the most important structural reforms has been the privatisation of electricity generation in Nigeria -- the single biggest hurdle to all the sub-Saharan African countries is energy. Just having an energy grid that is on 24 hours a day without interruption is going to have a massive impact.
I am also optimistic about long-term prospects for the Middle East -- despite medium-term concerns over a feverish pace of building in Saudi Arabia, the United Arab Emirates and Qatar.
Such nascent economies and undeveloped markets, of course, can be more volatile and pose relatively higher risks for investors. Political risks remain a big concern, as transitions of power can stir violence.
Nevertheless, I think there is a strong chance that the Africa and Middle East region will continue to outperform because its economic growth could be higher than emerging markets generally. Africa could continue to surprise everyone because of the structural changes taking place.
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