Australian managers remain sceptical about investment opportunities in the frontier markets of sub-Saharan Africa, despite a recent survey showing they are among the fastest-growing economies in the world.
Wingate Asset Management chief investment officer Chad Padowitz said the growth was off a low base and placed questions marks over its sustainability.
"It is the unfortunate history of the region that periods of economic destruction are followed by periods of strong recovery when a level of peace prevails, often aided by high commodity prices. This is the current situation," Padowitz said.
"It is very possible and even likely that as long as commodity prices stay high that sub-Saharan Africa can continue to close some of the gap and pick off the low-hanging fruit.
"Disposable income can grow even with high levels of corruption, political interference, et cetera, but only to a level."
A recent analysis by The Economist found that in the 10 years to 2010, six of the world's 10 fastest-growing economies were in sub-Saharan Africa.
Angola had the fastest-growing economy over this period, with an average annual gross domestic product (GDP) growth of 11.1 per cent. Nigeria was the second fastest-growing sub-Saharan economy at 8.9 per cent and Ethiopia was third at 8.4 per cent.
Unsurprisingly, China also scored highly as the second fastest-growing economy overall at 10.5 per cent.
For the next five years, The Economist predicted that, although China would be the fastest-growing economy, the top 10 would include seven sub-Saharan economies.
Ethiopia is expected to do best with an average annual GDP of 8.1 per cent.
However, Padowitz said the region was still too unstable to justify confidence that it was on a long-term path of economic growth.
"For Africa to move to sustainable long-term growth that ushers in a large middle class and world-class institutions and companies requires significant improvements in education, reduced political interference, greater accountability and less corruption as well as no more economic-destroying wars or dictators," he said.
"I am far less confident that this latter scenario can be expected as the resistance and vested interests to change are very great and historically have not been able to be overcome."
Sunsuper chief investment officer David Hartley said those frontier markets were appealing, but also warned economic growth did not always translate into growth of the equity markets.
"Frontier markets such as those in sub-Saharan Africa are interesting - basically they are the new emerging markets and will exhibit the same types of ups and downs that we saw with those markets over the last two decades," Hartley said.
"But you also need to be careful not to assume a one-to-one relationship between economic growth and growth in listed company values.
"An economy can grow, but the benefit of that growth might be captured in part by foreign multinationals, local labour, local governments, et cetera, before the foreign shareholders of local companies get their return."
But London-based Russell Investments Frontier Emerging Markets Fund portfolio manager Scott Crawshaw said institutional investors with a long-term perspective should consider making an allocation to frontier markets to benefit from the potential higher active returns and the added diversification benefits it brought to an emerging markets portfolio.
"The opportunity we see across global frontier markets, including Sub-Saharan African markets, is the opportunity for active specialist managers to discover investment opportunities with high return potential relative to the broader market due to the low level of institutional ownership, sell-side coverage and investor participation, particularly in the smaller-cap, less liquid parts of this sub-asset class," Crawshaw said.
"Our managers are generally focused on discovering and investing in strong franchises with strong management and industry positioning that are currently trading at attractive valuations from a long-term perspective.
"Names such as Ghana Commercial Bank, trading at nine times 2011 earnings, and Presscorp, a diversified conglomerate in Malawi, trading at six times estimated 2011 earnings would be two such examples."
