Dambisa Moyo: Search for Alpha Leads to Frontier Markets in Africa

Rwanda’s President Paul Kagame recently wrote a bullish op-ed in the Wall Street Journal about the “new lions of Africa,” referring to African economies — Rwanda included — that are poised to follow the growth path of the East Asian “tiger” economies of the 1980s and 1990s, such as South Korea, Taiwan, Hong Kong, and Singapore. Only 20 years ago, thinking of Rwanda in these terms would have been absurd. In 1994, the country was in the midst of a genocide. But in April 2013, Rwanda tapped the international capital markets for the first time with a $400 million sovereign bond issue.

Africa’s troubled history and high risk premiums are enough to discourage investors from investing in economies like Rwanda, but as international economist Dambisa Moyo argued at the 66th Annual Conference in Singapore, such frontier markets as Rwanda are actually offering higher equity market returns than developed and emerging markets.

Consider this: The MSCI Frontier Markets Index is up 9% year-to-date, while emerging markets have returned –4% year to date. Not too shabby in this low-yielding environment. No wonder, then, that Rwanda’s bond issue was highly oversubscribed.

Only $4 billion are invested in frontier markets today, said Moyo. Yet frontier markets have as much or even more upside than emerging markets: good public finances, growth prospects, young demographics, and potential for high productivity. In this low-yield environment, Moyo says the search for alpha leads to the frontier markets, and Africa is home to many of these economies.

Read more on the 66th CFA Institute Annual Conference blog