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from Global Investing:

Emerging markets facing current account pain

Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big  funding shortfalls.

The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of "deficit" economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says,  predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.

Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.

There are some supportive factors however. The Fed's signal this week that  U.S. interest rates are unlikely to rise before 2014 shows  that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations' balance sheets. Second, as growth eases, so will the deficits.  For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:

What will happen once (developed market) rates are raised is another story, and emerging markets would better have fixed their main imbalances when the global monetary normalisation begins.

Hurry boy, it’s waiting there for you!

Sick of hearing about China and Brazil? Just a little bit worried about all the money flooding into emerging market funds this year? Sceptical that South Korea can even be classed as an emerging market anymore? Why not try Africa?

If there was one thing that speakers at this week’s CFA Institute European Investment Conference all agreed on it was that Africa could be the next big thing for the daring investor.

Both leading economist Nouriel Roubini and Lars Christensen, head of emerging markets research at Danske Bank, believe Africa offers a viable alternative to crowded emerging markets, with economic growth likely to be driven by industrialisation and political and market reforms.

Foreign direct investment has picked up since 2000 with the Chinese building roads, ports and railways so that they can extract sought-after commodities from the interior.

Christensen cited Kenya, Mozambique, Angola and Tanzania as some of the most interesting opportunities, as these are introducing market reforms and have enjoyed growth throughout the financial crisis. “Uganda is also a good story. We are seeing the development of a financial sector in some of these markets.”

He added that Botswana is a fast growing economy which is investment grade and politically stable but one that has been overlooked because it is quite small.

Most investors have traditionally steered clear of Africa, alarmed by political instability but Daniel Broby, chief investment officer of frontier markets specialist Silk Invest, said that military coups were now the exception rather than the rule. “People who left to get a better education are now returning with MBAs from top universities, running companies and entering government to pursue change,” he said.

Morning line-up: Geldof’s equity tip, UK public pensions, Jupiter’s debut

News and views on the funds industry from Reuters and elsewhere:

Geldof’s investment tip for UK pension funds - FT

Public workers to pay more towards their pensions - Telegraph

Jupiter higher on market debut- Reuters

Quicker to get Out of Africa

With liquid hedge fund strategies so much in demand, Insparo Asset Management is shortening the redemption terms on its $165 mln Africa & Middle East fund because it ended up buying assets that were more liquid than it had originally expected.

Investors will be able to withdraw up to 25 percent of their cash per quarter, meaning they can fully exit the fund in a year should they wish — surely a welcome move, given it previously took two years.

Nevertheless, as with any hedge fund, it remains to be seen how it would fare should another credit crisis-type scenario occur, when buyers suddenly disappear, even in markets that are normally fairly liquid.

Someone who knows this well is Jamie Allsopp, former manager of New Star’s Heart of Africa fund, who is now in a marketing and investment role at Insparo.

New Star, now part of Henderson, had to suspend Heart of Africa in December 2008, citing difficulties in honouring redemptions. Two months later New Star announced the fund would be wound up completely and the portfolio sold off.

from MacroScope:

Frontier sovereign wealth funds

Macroscope has discussed the growth of sovereign wealth funds many times (see here or here). Just to recap, the global state-owned SWF industry is set to more than double in the next 10 years from the current $3 trillion, according to estimates from Deutsche Bank.

John Green, global head of business development at Anglo-African bank Investec, argues that Africa will play a key role in the expansion of SWFs in years to come.

"Africa is very rich in commodities. Africa in aggregate has gone from a significant fiscal deficit, largely funded by aid, to a continent that has a fiscal surplus. That's what has precipitated a lot of thinking around this issue," he says.

Green says he agrees with the view that in the next 5 years there will be enough surplus around in many African countries to begin to build future generation funds properly.

Libya is a leader here with the continent's biggest sovereign wealth fund, which manages $65 billion in assets. Nigeria is working on legislation to create a SWF aimed at softening any impact from falling oil prices.

Read the full Reuters interview here.

from Global Investing:

Can domestic demand boost African markets? Duet’s Salami talks to Reuters Television

Direct and indirect foreign investors fled from Africa as the credit crisis sparked a flight to safety, or at least familiarity, but Ayo Salami, manager of the Duet Victoire Africa Index fund believes domestic demand can step in to underpin growth.