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The case for exotic assets: Sub-Saharan Africa, Cuba and Bosnia

Can you afford to invest in Cuba’s London Club NPLs and maybe wait 20 years for a restructuring? Perhaps not, but there are other potential winning bets on the wilder shores of the emerging markets.

With spreads on sovereign emerging market debt over US treasuries compressed at their lowest levels in history and returns on developing nations’ stocks likely to be at their smallest in four years, investors will have to focus on other areas in emerging markets in order to make sizeable returns. Funds with a strong stomach and a sense of adventure should maybe turn their attention to more esoteric markets such as sub-Saharan Africa, Cuba and Bosnia.

Although many of these markets will be off-limits to most traditional long-only fund managers, they could provide rich rewards to hedge funds and other investors that have the capacity to take on big risks. Take sub-Saharan Africa-ex South Africa, for example. So far this year in equities, this region is outperforming developed nations as well as the more mainstream emerging markets. Sub-Saharan Africa-ex South Africa posted a return of 17.4% in dollar terms in the first quarter, according to Exotix, a broker that, as its name implies, specializes in these offbeat markets. This contrasts with a return of 2.1% for the MSCI World Index and of 1.8% for the MSCI Emerging Markets Index over the same period.

In the debt world, it’s harder to offer a similar comparison.

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