Piggy’s Trading & Investing Tips: Investing in frontier markets

The analysis makes use of the Buffet Indicator, which is basically the ratio between stock market capitalisation and GDP.

Piggy came across an interesting analysis by Tellimer Research which indicates that there are currently more attractive entry points in frontier markets (FM) and emerging markets (EM) when compared to developed markets (DM). 

The analysis makes use of the Buffet Indicator, which is basically the ratio between stock market capitalisation and GDP. This metric is a gauge of market valuation and shows that EM and FM are well behind DM. 

Some of the reasons that explain valuation gaps include the varying levels of privatisation, multinational presence, and private equity activity. That said, it appears that EM and FM exhibit attractive investment propositions, particularly for those with longer time frames and tolerance for lower liquidity.

The Africa frontier equity market space has largely been dominated by institutional investors with very minimal participation from retail investors.

Over the past 10 years or so, we have witnessed the emergence of Africa-focused Funds across the globe — set up to achieve long-term capital growth by investing in African equities. The appetite for African equities largely rose on the back of prospects of good returns and a means to diversify risk.

In recent years, countries in Sub Saharan Africa (SSA), excluding South Africa (including Zimbabwe), exhibited high GDP growth signals coupled with bottom-heavy demographic profiles, implying sustained demand growth.

There are also several transformational trends driving growth in Africa such as:

(i) financial inclusion,

(ii) fastest rates of urbanisation and

(iii) economic formalisation.

These trends are driving strong growth in the fintech, payments, banks, telco and healthcare sectors and underpin a robust African consumer story that is taking shape regardless of global volatility.

Piggy notes that both institutional and retail investors can participate in African frontier equity markets through various platforms and strategies.

Below are some of the methods that investors can use to participate and gain exposure in African frontier equity markets:

Africa frontier market investment platforms — Several Africa-focused stock broking firms have set up investment platforms that allow for investors to buy and trade stocks in Africa (with reasonable minimum amounts). This is largely done through Commission Sharing Arrangements (CSA) with locally registered brokers in various markets such as Nigeria, Kenya, Zimbabwe and Mauritius;

Investing via international exchanges — Some resource companies with operations in Africa are listed on exchanges such as the TSX, ASX or LSE where there are accessible to investors. Likewise, some South African/JSE-listed companies are increasing their exposures in some of Africa’s frontier markets. Investors can gain exposure to these markets by adding such stocks to their personal portfolios; and

Investment via Africa-focused funds — Investors can access frontier markets by choosing an investment fund run by experienced managers with in-depth, on the ground knowledge of these markets. Several investment houses in South Africa have set up Africa-focused funds.

Overall, it should be cautioned that frontier market investing is a different ball game altogether and is not for the novice investor.

Most African economies are still commodity-driven and therefore a slowdown in demand from Asian economies has a bearing on the performance of the economy and stock market.  Risks also remain elevated on the back of currency issues and other policy failures.

In addition, frontier markets tend to be volatile and lack liquidity. Further, trading costs are also high when compared to the JSE and other developed exchanges like the NYSE.

That said, stocks on our markets such as SeedCo International, Simbisa Brands, Delta Corporation also provide exposure to SSA economies thus offering a great avenue for geographical risk diversification. 

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