The global financial crisis of 2008 marked the end of the “historically perverse” financial flows from emerging markets to developed markets. As an increasingly important part of the emerging market universe Africa’s markets are set to outperform those in G4. It is a trend that will continue throughout 2011, says Standard Bank.
In its regular report the “African Markets Revealed”, the bank examines international and local factors that drive markets in 19 African economies, stretching across the continent from Egypt to South Africa.
Reviewing the prospects for the continent as a whole, Stephen Bailey-Smith, Standard Bank’s Head of African Research said that Africa would benefit from expected global growth, despite the risks posed to this by deleveraging of the US consumer market, funding problems in European countries and the tightening of monetary policy in China.
African markets were facing exciting times, said Bailey-Smith. “Emerging markets are in a strong position to increasingly contribute to global growth, while developed market policy makers have shown their determination to make the necessary deleveraging process in their countries as smooth as possible.”
“Emerging market growth outperformance will attract investment. This will see ‘frontier markets’ becoming economically stronger and reducing the gap existing between them and the broader, more established, emerging market economies.”
The increase in the fortunes of the frontier markets would be fed by declining returns on assets across developed and more mature emerging market economies.” As this occurs investment flows will look down the risk curve towards frontier markets-including those in Africa.
“The further we get from the nervousness of the 2008 financial crisis, the more willing investors will be to take on less liquid assets, which have tempered post-crisis investment flows into Africa.
It can be expected that frontier markets will outperform relative to developed markets and the more established emerging markets,” said Bailey-Smith.
“In line with this it can be expected that currencies of emerging markets will continue to outperform G4 currencies. The USD depreciated by about 1.1% against other developed market currencies during 2010, but by about 3.6% against a trade-weighted basket of emerging market currencies.
“The level of USD weakness has been consistent since January 2009, but the movement in emerging markets has been less volatile and relatively consistent to the weakness against developed market currencies, particularly the Euro,” said Bailey-Smith.
It could be expected that there would be continued volatility on the EUR/USD cross, with concern over the Eurozone debt crisis likely to place more downward pressure on the EUR/USD, with a move back towards 1.10 or even parity likely over the next six to 12 month