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SAO PAULO (Reuters) - Africa offers among the world's best investment prospects as emerging markets grow ever more important, although its economies risk being destabilized by the slew of capital they stand to attract in coming years.
Energy-producing continental giant Nigeria was identified as a top pick by some of the most influential figures in emerging markets finance who spoke to the Reuters Emerging Markets Summit in Sao Paulo last week.
Africa withstood the financial crisis better than many predicted, and the region's economic growth is forecast at 4.75 percent in 2010. Next year, half of the world's 10 fastest growing economies are expected to be in Africa, and it is now attracting more than just the most intrepid investors.
"The latent interest in Africa is enormous," said Stephen Jennings, chief executive of Russian investment bank Renaissance Capital, speaking to the Reuters meeting by video link from Moscow.
"Before the crisis there were probably 40 people or groups establishing Africa funds. In 3-4 years you'll have 100 Africa funds and the biggest one won't be $2 billion, it'll be $20 billion."
Fund tracker EPFR reports 43 consecutive weeks of net inflows to Africa equities funds, reaching $484 million in the first half of 2010 -- nearly double those to India over the same period.
Africa's advocates say the inflows stand to accelerate rapidly as a dearth of attractive returns in the developed world pulls investors in while a more stable political and economic environment indicates diminishing risks.
MSCI's index of Africa countries outside South Africa .dMI8600000P, though well off its year highs, is still up nearly 8 percent in 2010. The S&P 500 .SPX is more than 8 percent down.
A shift of global economic power to emerging giants such as Brazil, Russia, India and China -- known collectively as the BRICs -- benefits Africa as surging economies seek its resources and push up commodity prices and investment.
Brazil, Russia and India still trail China, which last year became Africa's biggest trade partner, but they have been rapidly expanding trade and putting more money into Africa.
"What's absolutely striking is how much change there's been between the BRIC countries and Africa," said Jacko Maree, chief executive of South Africa's Standard Bank, which is Africa's biggest. "We like to think that the whole story has only just begun."
Brazilian firms with a large African presence may soon issue bonds in South African rand to seize on growing interest, said Standard Bank's chief executive in the Americas, Eduardo Centola.
Nigeria's market of about 140 million people -- nearly three times bigger than South Africa's -- as well as its energy resources and bigger, more liquid markets, makes it the top choice for many eyeing Africa.
On the Goldman Sachs' growth-environment index, which measures a mixture of economic and social development indicators, Nigeria's score has nearly doubled over the past decade.
"If it were to show the same increase in its growth-environment score over the next decade, many investors will look back and say why the hell didn't I invest in Nigeria," said Goldman Sachs' global head of economic research Jim O'Neill, who coined the term BRICs.
Ethiopia and Rwanda are among the smaller African economies seen as promising. They show how previously ignored countries scarred by war are emerging as possible investment magnets alongside those such as Ghana, a relatively stable democracy which is soon to become an oil producer.
There are risks, though, with concerns over political stability even in bigger economies such as Nigeria and Kenya.
Africa experts underline the fact that new mineral riches have rarely been shared widely, and suggest reliance on such income for national coffers could discourage establishing tax bases that would put states on a sounder footing.
"Where I think the real caution has to come in is the quality of the growth," said Patrick Smith of the Africa Confidential newsletter. "It would be pretty silly to say success is certain."
A big influx of investment funds could in itself pose a problem for African countries less prepared to cope than those in other rapidly growing regions that have felt the pain of such flows in the past.
"Africa has no experience of huge capital inflows," said Renaissance's Jennings. "Under the scenario I'm painting, the capital inflows will be way above and beyond the ability of those countries to absorb them."
Most African countries have small, illiquid markets and little financial infrastructure, raising the chances of economic distortions and asset bubbles that could lead to currency crises and long-term damage.
"People look at how certain African economies have been getting their act together and there is a risk you will get significant capital inflows," said Mohamed El-Erian, chief executive of PIMCO, the world's largest bond investor.
"That will provide quite a challenge to policy makers."
Editing by Kieran Murray