Sub-Saharan Africa encapsulates the best of what the next generation of emerging markets has to offer investors in terms of potential investment returns over the long term, according to HSBC Global Asset Management.

“Nigeria is our favourite market in Sub-Saharan Africa. Financials are showing robust potential while consumer brands are also enjoying strong growth. Kenya, the regional hub for trade and finance in East Africa boasts - as is the case with frontier markets in general – cheap valuations and a number of advantageous macroeconomic factors, resulting in what we believe is a positive outlook. The telecommunications sector there has long-term investment potential given its ties to mobile banking, a rapidly growing sector,” Andrew Brudenell, manager of the HSBC GIF Frontier Markets fund, said in a statement.

The fund’s largest holdings are in the financial, telecommunications and energy sectors.

“Profitability also remains higher than developed markets and is rapidly narrowing the gap with emerging markets. [Frontier markets] historically behave as late-cycle markets and we believe they are benefitting as these regions enter a more mature stage of recovery.

“Frontier markets typically offer higher dividend yields than both emerging and developed markets, with some countries offering dividend yields nearing 8 per cent - for example Pakistan has an average of 7.7 per cent.  While there are headwinds we feel the impact will be to a lesser extent than other asset classes but we believe volatility in frontier markets will remain low compared to global markets.”

After quantitative and qualitative analysis to identify individual stock ideas a screening process identifies stocks with a market cap above $100 million with sufficient liquidity and reduces the number of stocks from approximately 3,000 to 500 stocks. The HSBC GIF Frontier Markets fund typically holds approximately 70-90 stock positions.

In the Middle East and North Africa the fund remains “more upbeat on the recent political changes in Egypt than the market and our long-term outlook for the country remains positive,” Brudenell said.

Brudenell remains underweight Latin America because of high valuations. In Eastern Europe exposure remains small and very domestically focused with no holdings having direct exposure to the troubled eurozone countries. Kazakhstan remains the largest country exposure as valuations, in his opinion, remain cheap.