Emerging markets are developing increasing depth and complexity, suggesting that the usual investor view of lumping the “BRICs” together is too simplistic, say fund managers.
Asia has long been the darling among emerging market investors, but Africa's ‘frontier markets' are also catching eyes. About half of the 25 fastest growing economies in the next five years will be in Africa. Foreign direct investment to the continent has swelled enormously, and China also announced its bilateral trade with Africa had increased by nearly 45% in a year to reach a record $115bn.
Nick Price, manager of Fidelity's EMEA Fund, is unapologetic about the prospects for Africa in the face of widespread pessimism about the continent: "The negative perception of Africa - shaped by images of poverty, famine and conflict - has kept the region off the radar screen of many western investors. But the conventional view is not matched by my experience on the ground. To me, Africa is a classic example of the gap between perception and reality, which leads to investment opportunity."
One of the least-remarked aspects of the financial crisis was the relative resilience of Africa to the global economic downturn, he notes. Economic growth in sub-Saharan Africa remained above that of the advanced economies before, during and after the crisis. Limited integration into the global economy may have helped, but as important were the strong fundamentals of many countries.
"Much of Africa's economy is actually unrecorded," explains Price. "This is clear when you see the huge amount of cash-based activity taking place at taxi ranks in Africa - from unlicensed bars (shebeens) to hair-dressing. All of this informal business is before you even consider the continent's subsistence farming (agriculture still accounts for about a quarter of Africa's GDP)."
It is this unreported economy that lies behind the recent upwards revision in Ghana's GDP by a staggering 70% in 2010. Price adds: "This has an extremely positive impact on credit ratings as ratios such as debt-to-GDP start looking considerably better, which in turn has an impact on the cost of funds in a country."
He says the cash-based nature of Africa's economy has profound implications for assessing real demand in the region: "When the credit crisis hit the western world, we quickly discovered that some of the demand was illusory. US automobile sales, for example, fell from 17m units to 10m units as much of the earlier spending had been funded by credit that should never have been granted. In Africa, the demand numbers stand up far better to scrutiny as there is practically no personal credit."
According to the UN, GDP per capita for Africa as a whole rose from less than $700 in 2002 to more than $1,500 in 2008 and could double again by 2013.