How to gain access to the next emerging markets story
Africa is one of the few fast-growing regions that is not dependent on the fate of China.
Investors looking for the next emerging market growth story should look past China to Africa, according to Mark Livingston (pictured)
, investment director in the Fidelity emerging markets team.
Livingston claims that many of the regions favoured by emerging markets funds are dependent on Chinese growth, meaning that when that country slows, so do they.
African countries do not have that problem, he argues. The growing presence of multi-nationals in the continent only adds to its attraction, which has led the Fidelity Emerging Europe, Middle East and Africa (EEMEA) fund to up its total exposure from 60 to 70 per cent.
Livingston explained: "The big issue with emerging markets is that a lot of the countries that benefited in the past decade were derivatives of the China growth story, and China has been so strong that finding independent stories has not been easy. However, in Africa that’s what we have found."
This morning FE Research
highlighted how the IMA China/Greater China sector has been one of the worst performers over the past five years, immediately after a period when it almost tripled investors’ money. Emerging markets in general have also fared poorly in that time.
Data from FE Analytics
shows that the MSCI Africa index has recovered from the 2008 crash further and faster than the MSCI China index, returning 33.27 per cent in the last five years compared with losses of 11.51 per cent from the Chinese market.
Performance of indices over 5-yrs
Source: FE Analytics
Investor appetite for Africa diminished a few years ago when many funds focused on the region closed. However, Livingston claims this trend has started to reverse.
"People are recognising the potential, particularly in the banks where you can pick up well-capitalised firms at cheap prices with a high return on equity," he said.
"It is secular growth on the continent as well, not cyclical," he added.
Star emerging market manager Mark Mobius – who
launched a fund entirely devoted to Africa – also finds banks to be one of the most attractive sectors on the continent.
"Banks in frontier markets give us access to the retail story in these countries, which is growing very fast as people open bank accounts," said Mobius.
Both Mobius’ Templeton Frontier Market fund and the Fidelity EMEA fund are overweight Nigeria. The country has this week been included in the most important emerging market bond index – the JP Morgan Global Diversified Index.
Livingston says the market is particularly exciting. His fund favours investing via western companies or stocks owned by them, such as Heineken-owned Nigerian Breweries.
"Those are the holdings we are excited about: where you get the corporate governance of a large western multinational with the growth potential of Africa," Livingston commented.
He adds that although the fund retains large exposure to South Africa, much if it is through companies that are using the country as a bridge into the less developed markets.
"Company management in South Africa is very strong; the country has problems on the governmental level, but the companies are very well-run for the benefit of the shareholders, and we look for those that are playing the broader Africa theme rather than focused entirely on the country."
"Even our South African stocks are a play on the broader African economy."
Funds with exposure to Africa
Source: FE Analytics
According to FE data, there are six funds in the IMA universe with more than 25 per cent invested in Africa.
Only one – Charlemagne Magna Africa – has a five-year track record, but it has significantly underperformed its benchmark since launch, with losses of 4.64 per cent.
JPM Africa Equity has the best three-year track record, delivering returns of 19.74 per cent – a touch less than its MSCI EFM Africa benchmark. It has outperformed over one year, however.
Fidelity EEMEA has returned 18.37 per cent over three years, beating its MSCI EM EMEA benchmark by around 5 percentage points.