As investors pull back from China, Africa, Latin America, Indonesia, and Malaysia are all winning.
Long considered the engine of global GDP growth, China has seen its population and labor force fall since it dropped its one-child policy. And though the country remains an essential player in the near term, the demographic shift, combined with a continued push from government officials to get U.S. state–managed funds to divest from China for political reasons, is leading institutional investors to explore alternatives in frontier markets.
Overseas investors have been pulling back from China, with foreign direct investment falling 28 percent year-over-year in the first 11 months of 2024, after a 30 percent decline in the same period a year earlier. U.S. net portfolio investment flows dropped sharply in 2022, with more than $30 billion in net outflows in 2023. U.S. private equity investments fell from $140 billion in 2019 to $93 billion in 2021 and $4 billion in 2023. Of course, not all investors are abandoning China, including the $2 billion Inatai Foundation in Washington state.
“For GDP growth, you need labor force participation, labor force growth, and productivity growth,” Mercer global chief investment strategist Rich Nuzum tells Institutional Investor. “If populations are declining in the developed markets and in China, which is the world’s second-largest economy, that’s not good for GDP growth or capital market returns.”
On top of the challenges with demographics, China is facing trade and geopolitical issues, leading real-world supply chains to look elsewhere to produce. So economies offering ample labor, favorable policies, and evolving supply chain opportunities are benefiting from China’s tensions with trading and security partners.
“India has been the biggest beneficiary, but other economies like Indonesia, Malaysia, and even parts of Africa and Latin America are attracting production and capital flows as companies diversify their supply chains,” Nuzum explains.
Africa in particular is expected to account for a significant share of the global workforce by mid-century, driven by population growth and rising productivity potential (the U.N. projects that more than 25 percent of the world’s population will be African by 2050).
“We’ve talked about the Asian Century for a while, but we’re going to get to the African Century in the second half of the century,” Nuzum says.
United Nations former chief economist Ayodele Odusola has highlighted Africa’s investment potential, citing the highest rate of return on foreign direct investment — 11.4 percent compared with a global average of 7.1 percent — and rapid growth in sectors like banking, telecommunications, and infrastructure. With six of the world’s fastest-growing economies, a young workforce, and improved governance reducing risk, Odusola argues, the continent presents clear opportunities for institutional investors seeking diversification and long-term growth across asset classes. Some see opportunities, and challenges, in venture capital.
Emerging-markets specialist Ashmore Group highlights the tailwinds benefiting African countries like South Africa and Egypt. South Africa’s coalition government seeks to address unemployment, corruption, and service delivery failures while prioritizing sweeping infrastructure, energy, and governance reforms.
“These reforms, alongside efforts to attract investment and revitalize manufacturing and exports, could significantly enhance GDP growth in the coming years,” wrote Ashmore’s Gustavo Medeiros and Ben Underhill in a recent research note.
And though Egypt has recently struggled with significantly reduced traffic in the Suez Canal, the country is stabilizing its economy through support from the International Monetary Fund and major infrastructure and energy investments from the UAE.
Medeiros also noted that the impact of potential tariff hikes from the U.S. could be deflationary for many emerging markets and could lead Chinese authorities to implement substantial policy easing — a good thing for emerging markets overall.
“Given China’s central role in many emerging-markets economies, this policy easing would likely have positive spillover effects across EM, mitigating the broader damage from tariffs and creating a potential divergence in performance between overvalued U.S. equities and undervalued EM assets,” Medeiros explained.
Nuzum notes that innovations in AI and digital platforms have enabled remote work, allowing more of these growing populations in emerging and frontier markets to participate in the global workforce. “Workers in these regions can participate in global supply chains and knowledge economies without physically emigrating, potentially accelerating productivity growth,” he says.
However, significant hurdles in Africa remain, one major barrier being that of the continent’s 54 nation-states, “not a single one has an investment-grade credit rating as a sovereign,” Nuzum points out. “How do you do infrastructure investment or any type of investment in a country where even the government doesn’t have investment-grade?”
Amid the dearth of investment-grade government borrowing options in Africa, Nuzum says, “there is a lot of innovation happening in securitization and risk management aimed at this challenge.” Innovations in private credit and securitization are helping structure investments to achieve stronger credit quality, channeling capital into entrepreneurial ventures and infrastructure.
By addressing essential needs — from job creation to education and basic services — these investments not only unlock economic opportunities but could also strengthen the foundations for long-term growth in the region.
“Anytime you put money in an emerging or frontier market, you’re helping with employment, education, health, water, all the basic needs,” Nuzum said. “So it tends to lift the level of economic activity and help with a lot of goals.”
