While the last ten years were a lost decade for developed market equities, this is far from true for emerging markets, said David McIlroy, chief investment officer at Alquity, at the launch of the firm’s new investment model.  

Emerging markets’ dominance in the physical world is well known said Mr McIlroy, but their increasing financial dominance – emerging markets hold 75 per cent of the world’s foreign exchange reserves – is less so.

“They have always had the labour, the land, and now they have the capital,” said Mr McIlroy. However asset allocations towards these markets lag: the average pension fund has an allocation of only 5 per cent towards emerging markets.

While there have been good runs in Asian and Latin American equities, one area often overlooked is Africa, said Mr McIlroy. But investment opportunities exist where perceptions differ from reality and nowhere is this disparity greater than in Africa, partly due to the way it is portrayed in the media, he said.

Structural trends favour the continent. It has an area nearly twice the size of Russia; it is rich in natural resources and still largely under-explored in terms of oil and gas wealth; it has massive potential for infrastructure development, as demonstrated by the explosive growth of telecommunications; and it is the world’s youngest continent, with the proportion of working age people set to increase over the coming decade.

Also, it is richer than generally perceived, said Mr McIlroy: ten countries have a GDP per capita above China’s, and 17 have a GDP per capita above India’s.

Furthermore, some 29 African countries now have stock markets, up from five in 1989, and market capitalisation for the continent has grown from $245 billion in 2002 to around $1000 billion in 2009. There is also a diversification argument, as these markets have lower correlations with developed markets than either emerging markets or Asia.

Another rising trend is intra-emerging market trade and finance flows, as demonstrated by the growth of China’s foreign direct investment in Africa, said Mr McIlroy: “If you’re optimistic on China, and you’re bullish on that, you have to be bullish on Africa.”