COPENHAGEN (Reuters) - Fund managers should consider African markets such as Ghana, Kenya, Nigeria and Tanzania rather than chasing crowded emerging market trades elsewhere, economist Nouriel Roubini said.
“It (Africa) is risky because there is less liquidity and the governance is not ideal. But in comparison to 10 years ago when there was civil strife and unstable governments, many things have improved,” Roubini said.
Roubini, professor of economics and international business at the Stern School of Business in New York, is best known for forecasting the credit crunch.
He was not as optimistic as those who see sub-Saharan Africa as the next BRIC (Brazil, Russia, India, China), citing fundamental problems of disease, poverty and a lack of human and physical capital, but he said Africa was an alternative for investors becoming wary of toppy mainstream emerging markets.
Roubini, speaking to Reuters on the sidelines of the CFA Institute’s European Investment Conference, said a wall of money was rushing indiscriminately into emerging markets such as China, India and Indonesia, with investors failing to look closely at underlying fundamentals.
According to Lipper FMI, European-domiciled emerging market bond funds alone have achieved net sales of 9.5 billion euros (£5.9 billion) this year, with emerging market equity funds winning net sales of some 15.6 billion euros.
Roubini was particularly wary of Indian equities, where valuations were becoming disconnected from fundamentals, and South Africa, where the rand is looking over-stretched.
So-called frontier or exotic markets such as those in sub-Saharan and west Africa were briefly in vogue just prior to the credit crunch but a lack of liquidity and investable assets have hindered development.
New Star’s Heart of Africa fund, one of the pioneers in the space for retail investors, was wound up during the credit crunch with the firm citing liquidity problems in some markets.
Fund managers must also wrestle with a lack of transparency, restrictive foreign ownership levels, and undeveloped market infrastructure.
Specialist frontier market fund managers such as Silk Invest stress the importance of having people on the ground in local markets to identify which broker was holding a particular block of shares, to evaluate the accuracy of data put out by companies and to find new investment opportunities.
Silk Invest, which invests in both bonds and equities and is preparing to launch a private equity African Food Fund, has people in Cairo, Casablanca, Kenya and South Africa.
Editing by Sinead Cruise and Dan Lalor