African stock markets are examples of an entire investable universe of markets beyond the conventional horizon, according to Investec Asset Management.

The South African firm argues that frontier markets in general are under-represented, often poorly understood or inadequately researched and for those reason often excluded from investors' portfolios.

Of the 824 stocks in the MSCI Emerging Markets, about three-quarters of the index are drawn from the BRICs plus South Korea, Taiwan and South Africa, according to Kemal Ahmed, portfolio manager of the emerging and frontier markets equity strategy at Investec.

In a white paper published in a report compiled by UK publisher Clear Path Analysis, Ahmed says that diversifying exposure by investing in an actively managed frontier markets fund, benchmarked to the MSCI Frontier Markets Index, will mainly result in exposure to five frontier markets. Out of those five markets, Nigeria is the only African candidate and, as a result, investors miss out on expected diversification benefits.

Investors should instead consider incremental allocations to benchmark-agnostic investment strategies focused on these markets with strong emphasis on local perspective, says Ahmed.

Murky waters

While emerging markets have become an established part of most investors' global portfolios, frontier markets are still by and large uncharted waters. Recent political turmoil in the Middle East and North Africa has hardly increased conservative wealth preservers' appetite for developing markets beyond the BRICs. However, Investec believes investment in smaller emerging and frontier markets rests on economic liberalisation, favourable demographics, urbanisation and the emergence of domestic demand amid economic growth.

Six of the ten fastest growing economies in the ten years to 2010 were in sub-Saharan Africa: Angola, Nigeria, Ethiopia, Chad, Mozambique and Rwanda.

However, as noted elsewhere in the report, Fagmeedah Petersen, independent trustee in South Africa (including the pension fund for government employees), only four stock markets in Africa are members of the International Federation of Exchanges.

“One of the biggest risks people don’t realise is the capital markets’ infantile state of development,” she says. “Africa’s listed markets have been extremely volatile and so for the year-to-date anyone who hasn’t gone into Africa has breather a sigh of relief.”

At the same time, Petersen still argues that there are pockets of opportunities in Africa and other frontier markets: “If you don’t consider the African scene you are sacrificing the very youthful demographic opportunities that Africa presents,” she says. “We are talking: forestry, livestock, grains and a number of agrifunds that have come to the markets for Africa in the last few years and they are expected to do great things.”