Frontier fund managers who once mainly charted the stock indexes of Dubai and Doha are looking increasingly at Lagos and Lusaka.
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Fund managers in the Emirates are building up positions in sub-Saharan Africa to counter a rapid decline in Gulf markets where share prices have tumbled this year.
"We are definitely bullish on Africa," said Mark Mobius, the executive chairman based in Singapore of Templeton Asset Management's emerging-markets group. Nigeria now has the largest country weighting in the Templeton Frontier Markets Fund, accounting for 11 per cent of its investments. The UAE accounts for 8 per cent of the same fund.
Gulf investors and fund managers are banking on growth in the continent's economies to perform strongly in light of a weakened global economic outlook.
The economy of sub-Saharan Africa is expected to grow by more than 5 per cent this year and next, compared with 2.8 per cent in 2009, according to a report published by the IMF last week. That compares with a projected growth of 4 per cent this year for the Middle East, 1.5 per cent for the US and 1.7 per cent for the EU.
Africa accounts for 13 per cent of the MSCI Frontier Markets Index, while the Middle East accounts for 60 per cent. That split could shift as more funds are drawn to the continent and banks move operations. Barclays and Standard Chartered have relocated employees serving the continent from Dubai to South Africa.
"These markets have a lot in common with the Gulf, although they have different economies and GDP per capita. Middle East and sub-Saharan markets both have underdeveloped capital markets," said Rami Sidani, the regional head of investments at the asset management company Schroders in Dubai.
Mr Sidani manages US$50 million (Dh183.6m) of assets for the company's frontier fund, launched in January, domiciled in Luxembourg and heavily invested in the Middle East and Africa.
"For us, it was a natural expansion to move into sub-Saharan markets as a diversification play, particularly Nigeria and Kenya, given that we are already looking at Egypt, Morocco and Tunisia," he said.
One of the selling points for the sub-Saharan market is that it indirectly benefits from the Chinese growth story, said Mr Sidani. Africa is home to 30 per cent of the known mineral deposits in the world, and China is the largest user of minerals, especially copper and zinc.
Invest AD, based in Abu Dhabi, is a major investor in Nigeria's banks, aiming to benefit from the country's economic growth, expected to reach 7 to 8 per cent this year.
"Some banks are trading below book value, indicative of the attractive valuations on offer in a Nigerian stock market that is only starting to perk up for the first time since the global financial crisis," said Mohammed Al Hashemi, the head of asset management at Invest AD. "With non-performing loans at single digits, loan growth is forecast at around 15 per cent this year, with some banks probably reaching 25 per cent."
The Nigerian Stock Exchange, one of the most liquid bourses in Africa, has a $50.9 billion market size that is equivalent to 18.1 per cent of the country's GDP.
In contrast with other frontier markets, African economies fared comparatively well during the global financial crisis in 2008 as a result of weaker linkages to the rest of the world. Changes in ownership structure and integration of African banks into the global financial market have been slow, which helped avert a crash in the continent's financial services sector.
Now Africa is again attracting attention.
"There is a wider trend of frontier-market funds being launched with asset managers building positions or placing bets on sub-Saharan Africa," said Fadi Al Said, a senior fund manager at ING Investment Management in Dubai. "The appeal is that they have shown over a long period of time a low correlation with global markets, so from a risk perspective it makes sense."