African Portfolio Investment - Moving East

Given the collapse of international portfolio investment into Africa in 2008 and 2009, borrowers and issuers in the continent must be looking at the likelihood of an equal (or greater) financial crisis in the West with trepidation. In 2009, 44% of all external portfolio investment in Africa was held by the US and only slightly less from Europe. As Europe collapses and the US stagnates, the prospects for significant new issuance to investors in these regions appears remote. 

Given the positive economic trends that are evidence in many African countries, this may appear to be a potential disaster, but perhaps not. Perhaps we will simply see a continuation and expansion of the trends recently apparent towards inward investment being made from Eastern Asia. 

Over recent years, Chinese FDI in the continent has been well documented. This has taken place on the back of the country's insatiable appetite for resources and has supported the necessary infrastructure for such resources to be exported. Today, I believe that we are about to see an expansion of this trend into portfolio investment into bonds and equities. 

Look, for example, at the debt issue by Senegal earlier this year. Only 4% of the issue was placed in Asia, but the issue soared in price. Was this a result of a lack of interest by Asia or simply that the issue wasn't marketed in Asia? My guess is that it is the latter.

As infrastructure continues to be built and exports from Africa continue to expand, I'd expect continued expansion of portfolio investment from  Asia. Pension Funds and other investors are seeking to internationalise their portfolio and are generally seeking the holy grail of diversification. Dont get me wrong, Africa wont be immune to the economic travails of the West, but the impact will be cushioned by continuing demand from Asia. Asian investors will also be comforted by the relationship with Asian importers and the ability to structure securities where cash flows emanating from Asia will pay off principal and debt of bonds, or finance dividends for equities. 

Expect to see the HKSE and SGX becoming the more dominant home for African equity listings rather than AIM and expect to see the Dim Sum market and  Asian syndicated loan markets launching more debt issues. 

Does London see this coming?