Africa leads emerging markets

LAST week must have been among the bleakest for emerging market investors, even in these sombre times. To add to the old story of how Japanese intransigence is contributing to Asia's grief, last week saw renewed instability in Russia - arguably the most important emerging market in the world. Speculation the rouble will devalue has sent shock waves throughout the emerging market asset class, pummelling Asian and Latin American stock markets alike. With two devastating bombs in Tanzania and Kenya, one would expect that similar turmoil could be repeated for Africa. Indian and Pakistani investors are still counting the cost of their nuclear testing, and with all the other events which gripped world markets last week, it begs the question: is there nowhere safe for an emerging market equity investor? Perhaps predictably, the answer is yes. While Asia, Latin America and Eastern Europe have been battling against the dangers of contagion from crisis-hit neighbours, Africa - among the least researched regions - has been showing impressive resistance to the turmoil afflicting the rest of the sector. Terrorist bombs notwithstanding, one amazing statistic circulating emerging market research desks in the past week, is that at an estimated 4.6 per cent gross domestic product growth this year, and 4.9 per cent next year, Africa is set to be the world's fastest growing region. At a time when diversification is crucially important, particularly for Asian investors, an investment in Africa is not a bad bet. The prospects it offers not only promise strong growth, but sustainable growth, because unlike Asia in the heady days, is it underpinned by sound macroeconomic policies. Asian investors such as Regent Pacific have started showing interest in the region, launching an Africa fund last year, and the scope is growing for more plays on the market. Flemings, the British investment bank, has revealed that its Fleming Africa Index, excluding South Africa, has outperformed the World Bank's International Finance Corp Index (IFCI) by 18 per cent in the past seven months - making it the best performing emerging market in the world. Even with South Africa, the index is up 9 per cent, and only with the exception of Namibia and Egypt, all African stock markets - comprising Botswana, Ghana, Kenya, Malawi, Mauritius, Morocco, Tunisia and Zimbabwe - have all outperformed IFCI. The economies' strength and stability has been so marked that last year sub-Saharan Africa ran a primary budget surplus and the overall deficit fell to 4.5 per cent. One factor that has always frightened investors has been the concern that African countries are riddled with corruption and opaque practices. Flemings however, argues that corruption in African nations is no higher than other emerging markets. The annual study by the Geneva-based World Economic Forum puts corruption in Russia and Central America higher than many countries in Africa and puts it on the same level as Eastern Europe, and only slightly above Asia and South America. Indeed another telling statistic is that 39 out of 53, or 73 per cent of African countries, can boast democratic governments. That puts many Asian countries in the shade. Encouragingly, in the private sector in many African countries, there is the stirring of activity. While overall investment still remains low, private investment is rising, which in an environment of increased political stability makes for an attractive cocktail of growth. Of course nothing is without risk. Africa can only maintain its strong growth by flagging up to foreign investors the virtue of its markets and the safety of investments. Investors with long memories will remember the huge amount of capital flight that took place between 1970 and 1992, amounting to an estimated 70 per cent of private wealth. In addition, rather like Asia today, African nations which might legitimately represent a good investment suffer from contagion generated by the bad behaviour of neighbouring countries - and like South Africa, could even suffer deleterious effects from the Asian crisis. Many African countries are also vulnerable to the vagaries of the commodities markets, whose outlook is still looking unfavourable in the near to medium term. Flemings says that Botswana, Egypt, Mauritius and Morocco will see the greatest benefit from strong market growth, and durable fundamentals to make them a positive buy. Cote d'Ivoire, Ghana, Malawi, Namibia, South Africa and Tunisia are less certain with good and bad points countering each other, but Kenya, Zambia and Zimbabwe are experiencing deteriorating conditions, and declining corporate earnings. Whatever the relative prospects, many of these nations deserve greater attention - and when other emerging markets are suffering, one could do worse than not invest assets into one of the strongest growing regions of the world. Close: 5,455.00 Down: 382.00 points