Capital marketsAs risk appetite swells, investors are moving money to the smallest, most volatile markets in Africa and the Caribbean, lured by a growing sense that a recovery for the global economy is under way and investment in these frontier markets will reap hefty returns. These markets are recovering after a forgettable nine months. They enjoyed a run of fame in 2007 and into 2008, when many logged double-digit percentage increases. The TNJ Index for June was mixed, but the long-term trend for the second half of 2009 is up on the prospects for a painfully slow recovery.

Morgan Stanley Capital International (MSCI)’s frontier-markets index, containing stocks from 25 countries, peaked in January 2008 before plunging 69 percent by early March 2009. Since then, the index has jumped 51 percent. In the four weeks to June 19, the index rose 8 percent for Egypt and 20 percent for Kenya, but fell 4 percent for South Africa, 7 percent for Jamaica and was steady for Trinidad. The Barbadian market has also been illiquid and the number of tourists has declined markedly in recent months, but a slow rebound is expected perhaps by the end of the year.

Frontaura Capital, which runs a frontier-markets equity fund in Chicago, estimates the fund is up 26 percent for 2009, taking its performance back roughly to the levels of early October 2008. The run-up in commodities has piqued investors’ interest in African and Caribbean countries that produce them. A year ago, for example, shares in coffee, sugar, gold and other precious metals were overvalued. Now some look cheap.

“Our feeling is these markets are undervalued and overlooked,” says Lawrence Speidell, chief investment officer of Frontier Markets Asset Management L.L.C. “Some countries there are doing very well and there are a lot of opportunities throughout the continent.”

Speidell’s La Jolla, Calif., firm has invested 60 percent of its portfolio in Africa. He’s also bullish on financial stocks. Banks in these markets make money the old-fashioned way. “They take deposits and make careful loans, they have huge net interest margins and low loan-deposit ratios. They are good quality banks,” he says.
Speidell also says some Caribbean and African markets didn’t decline much as a result of the global financial crisis, but they have become more illiquid lately, as sellers are unwilling to push prices down. But he sees good investments in such countries as Ivory Coast, Uganda, Namibia and Kenya. “We have buy orders waiting, but sellers have stiffer offers,” he adds.