Some investors in global and emerging market funds are starting to become nervous that such markets have risen too far, too fast (see Asian Investor article). After a nice run since early March, investors in emerging market funds that are tracked by EPFR Global have seen investors pulling a net $1.87 billion out of Asia ex-Japan, Latin America, Europe, Middle East, Africa, and diversified global emerging markets equity funds as of June 24th. High-yield bond and global equity funds also saw their string of consistent inflows stop, with the funds flowing into money market and U.S. bond funds. The reversal of flows has been driven in part by investor worries as to when foreign demand for manufactured goods and commodity exports will increase. Russia and Brazil equity funds, which are commodity dependent, are also posting new outflows.

As a few examples, the yearly charts for both EEM (iShares MSCI Emerging Markets Index) and the EFA (iShares MSCI EAFE Index ETF) reflect some of this indecision in the second half of June, but the trends are not unlike what has been observed in the S&P 500 Index over the same period.

Source: Bigchart.com

This slowdown in the bullish trend comes just as the International Energy Agency cut its expectations for medium-term global oil demand (see Financial Times article), with the recession diminishing the medium-term risk of a supply crunch as the spare capacity cushion remains healthy. Natural gas storage is also up (see EIA article) and above the 5-year historical range.

Yet, not everyone appear as cautious or nervous, with many analysts and traders still bullish (see SeekingAlpha articles here and here and here). In addition, as hedge funds are near completing one of their best starts of the year since 1999, many managers expected capital to continue to flow into their funds, especially those funds that are focused on emerging markets (see The Australian article). Given that many emerging market funds are commodity driven, then next few weeks/months should be telling as data on the summer driving season, housing, and currencies markets will help signal if the commodity correction has indeed arrived (see SeekingAlpha article), and whether or not emerging markets will continue their recent strength.

Large emerging market companies, such as Tata Motors, are taking advantage of the recent global downturn (see Economist article). Such companies are finding they can take advantage of their relative positions in making low-cost production models, due in part to their inexpensive labor. Even without global demand, growth in developing companies is still increasing, even though it has slowed, allowing such companies to stay afloat due to local demand. Finally, there is less international pressure on companies that can make it domestically, since multi-national companies are focusing their investment at home, and becoming more inward looking. Such a development can allow a company making greener technologies, such as Tata, to gain a stronger position, while also allowing new companies more opportunity to get started without high initial competitive pressures.

Initial results show that the Credit Suisse / Tremont Hedge Fund Index was down 5 percent in October (see MarketWatch article) - final numbers will be released on November 17th. Not surprising, fixed income arbitrage suffered some of the worst monthly losses, losing 17.75 percent. Emerging markets were close behind with 15.36 percent in losses. Fixed income managers have suffered as a result of loses in mortgage-backed securities and corporate bonds, each of which have fallen in price due to a combination of decreasing credit quality, forced selling, and decreased liquidity. Managed futures and short bias funds are both up for the month, and year-to-date. Convertible arbitrage is down the most year-to-date, losing 19.45 percent (which while bad is still better than the broader market losses).

A few months ago BullBearTrader highlighted a U.S. News and World Report interview with Jon Auerback, in which he discussed potential new BRIC-type countries (see the original article, or initial post). In the article Auerback mentions Nigeria, Zimbabwe, and Kenya as potential regional opportunities. Other analysts and investors have also begun to talk about Africa as being one of the next regions for achieving above average growth and investment opportunities, even given some of the political, economic, and inflationary risks that still exists.

To take advantage of current and future redistribution of capital into Africa, Van Eck Global is offering a new frontier market exchange traded fund called the Market Vectors Africa Index ETF (AFK). For more information, see the IndexUniverse article, or read the prospectus. The AFK is not the first vehicle to begin tracking the performance of companies domiciled or operating in Africa. In a recent post we discussed the newly offered PowerShares MENA Frontier Countries Portfolio (PMNA). The PMNA tracks the Nasdaq OMX Middle East North Africa Index, which includes the countries of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Nigeria, Oman, Qatar, and the United Arab Emirates.

The AFK is unique in that it follows the Dow Jones Africa Titans 50 Index, covering 50 stocks from 11 different African markets, including Nigeria (32.5% weight total, 25.2% onshore, 7.3% offshore), South Africa (26.2% total, 24.7% onshore, 1.5% offshore), Egypt (13.1%), Morocco (11.4%), Equatorial Guinea (6.2% offshore), Zambia (3.4% offshore), Angola (2% offshore), Mali (1.7% offshore), DR Congo (1.5% offshore), Kenya (1.2%), and Ghana (0.7% offshore).

A few points are worth noting about the index. For one, not all of the companies in the index are domiciled in Africa but are nonetheless included since they derive a majority of their revenues from African markets - thus the classification of "offshore." Also, the index is not constructed totally of frontier markets. Both South Africa and Egypt are typically classified as emerging (see previous post for a discussion of the distinction between emerging and frontier markets). This classification is important given that the emerging markets represent nearly 40% of the index. This actually gives the index both the higher growth and return potential of the higher-risk frontier markets, but also some of the liquidity of slightly less risky investable emerging markets.

The index is market cap weighted and sets maximum holdings at 25% for countries and 8% for any individual companies. Of interest is that Nigeria is already overweight at 32.5% total weight, with 25.2% onshore. It is not clear if the offshore percentages are included in the 25% country limits. Banks currently make up 33.7% of the index, with basic resources at 18.2%, oil and natural gas at 13.5%, telecommunications at 10.2%, and technology at 7.3%. As for components, the fund states that it "..will normally invest at least 80% of its total assets in securities that comprise the Africa Titans 50 Index." Companies must have market capitalizations greater than $200 million. The fund's prospectus also mentions that it may utilize derivatives. The expense ratio for the fund is 1.2%, which can be waived down to a net expense ratio of 0.83%, but is still expensive compared to some of its peers.

While not a pure frontier market ETF (there currently are none), the index does give concentrated exposure to the African region, allowing investors to follow their belief that growth in Africa may be the next big thing. Given capital flows into Africa, and the benefits of higher commodity prices for some of natural resource rich countries in the region, a small exposure to Africa within your portfolio may be worth considering.