Dambisa Moyo: Search for Alpha Leads to Frontier Markets in Africa

Dambisa Moyo

Rwanda’s President Paul Kagame recently wrote a bullish op-ed in the Wall Street Journal about the “new lions of Africa,” referring to African economies — Rwanda included — that are poised to follow the growth path of the East Asian “tiger” economies of the 1980s and 1990s, such as South Korea, Taiwan, Hong Kong, and Singapore. Only 20 years ago, thinking of Rwanda in these terms would have been absurd. In 1994, the country was in the midst of a genocide. But in April 2013, Rwanda tapped the international capital markets for the first time with a $400 million sovereign bond issue.

Africa’s troubled history and high risk premiums are enough to discourage investors from investing in economies like Rwanda, but as international economist Dambisa Moyo argued at the 66th CFA Institute Annual Conference in Singapore, such frontier markets as Rwanda are actually offering higher equity market returns than developed and emerging markets.

Consider this: The MSCI Frontier Markets Index is up 9% year-to-date, while emerging markets have returned –4% year to date. Not too shabby in this low-yielding environment. No wonder, then, that Rwanda’s bond issue was highly oversubscribed.

Only $4 billion are invested in frontier markets today, said Moyo. Yet frontier markets have as much or even more upside than emerging markets: good public finances, growth prospects, young demographics, and potential for high productivity. In this low-yield environment, Moyo says the search for alpha leads to the frontier markets, and Africa is home to many of these economies.

“Africa is where the emerging markets were ten years ago,” said Moyo, author of Winner Take All: China’s Race for Resources and What It Means for the World, as well as other best-selling books.

The Zambian-born Moyo said that Africa has benefited from being “ring-fenced” from the global financial crisis and thus has been able to keep on growing while developed economies fell into recession. The continent has 1 one billion people and plenty of untilled arable land.

Chinese investors have been trailblazers in the frontier markets, especially in Africa. Export-Import Bank of China has lent more to Africa and Latin America over the past decade than the World Bank. Chinese projects in Africa tend to focus on meeting China’s strategic needs for energy, minerals, and food. Investors in Africa tend to focus on resource-related opportunities, but Moyo said Africa is more than a commodities play. About 80% of listed companies in Africa are non-commodity stocks.

Although Africa had been isolated from the global financial crisis, the continent’s deepening economic ties with China make it vulnerable to a slowing Chinese economy. Moyo said many governments in Africa are “woefully ignorant” of the knock-on effects on their economies from this slowdown.

Despite her bullishness on Africa — she favors investing in Ghana over Nigeria, for example — Moyo acknowledged the challenges of investing in Africa, including corruption and the lack of freedom, which she argued has been slowly improving over time, citing data from watchdog Transparency International.

When looking at the challenges and risks in Africa, it might be useful to put them in an Asian “tigers” context. Hong Kong struggled with a corruption problem until the 1970s, when the colonial government established an independent anti-corruption body that took on dirty cops, triads, and other groups. Robust laws and regulations and fair enforcement have played a key role in attracting foreign capital into Hong Kong and Singapore. South Korea, previously ruled by dictatorship, is now a vibrant democracy.

The question, then, is: Can Africa’s “new lions” manage to do the same?

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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