frica may be the last great ground-floor international investment opportunity left on earth. Until just recently, however, the continent has remained beyond the consciousness of all but the most adventurous of investors. But now Africa is beginning to gain a wider audience in financial circles. Why? Because it has notched strong growth for the last decade and is likely still in the early stages of a powerful and transforming spurt of economic progress.
The mature economies of the developed world—the U.S., Europe and Japan—must contend with tepid growth, aging populations and painful fiscal retrenchment for years or even decades to come. But Africa is in precisely the opposite position. Having enacted economic and political reforms and shaken off its post-colonial torpor, Africa is on an impressive growth trajectory. The continent’s market-based ideals are solidifying, and it is simply a matter of time before its capital markets and economies become more developed, liquid and integrated with the global financial system.
Today the continent—sub-Saharan Africa in particular—features rapid growth, abundant natural resources and a large, young and increasingly educated workforce.
Whether pertaining to a company, country or continent, investors who perceive opportunity before others—and then act decisively on their perceptions—position themselves to be rewarded with higher returns for longer periods.
Africa, admittedly, continues to suffer from a serious image problem. While deserved in certain cases, the outside world’s perception of Africa as a place of poverty, hunger and incessant warfare has kept many investors away. The media in the developed world does Africa no favors by focusing intently on its problems and paying minimal attention to its positive developments. But tough image or not, Africa is moving forward. Vibrant entrepreneurship and resourcefulness are in full display in much of Africa as people seek to build better lives for themselves and their families. While this progress may not show up on your nightly newscast, strong economic growth and a lengthening track record of solid equity market returns indicate that things are turning for the better.
The continent’s present image creates an opportunity for today’s smaller investor. Once the media’s focus shifts to the positive change in Africa, institutional investors seeking a durable growth opportunity will come calling and investment bargains will become scarce. Just to note: the cover of The Economist Magazine on December 3, 2011 was entitled “Africa Rising,” whereas in May 2000 the same magazine dubbed Africa “the hopeless continent.”
Our Investment Thesis
Africa is the most complex continent on earth and defies simple descriptions. It has one billion of the world’s seven billion people and 20% of the world’s land mass. Behind Asia, it is both the second largest and second most populous continent. It has 54 countries with hundreds of ethnic groups speaking more than one thousand languages. One (mostly) common theme throughout the continent, however, is that the quality of life is improving.
The following themes support our investment thesis for Africa:
- Africa is growing rapidly
- Africa has immense natural wealth
- Africa has favorable demographics (for investors)
- Technology is accelerating change in Africa
- Africa is joining the global financial system
Around the year 2000, after two decades of tepid to non-existent growth during the post-colonial era, Africa began to stir. For the last decade, Africa has been on a steep trajectory higher. The International Monetary Fund (IMF) estimates that Africa grew at a rate of 6% per annum over the last decade—a rate much faster than the developed world and twice as fast as Africa had been growing for the prior two decades. The IMF expects sub-Saharan Africa to grow 5.4% in 2013 and 5.7% in 2014.
To be sure, the continent is rising off a very low economic base. But this depressed starting point is an attractive attribute for early investors, as it sets Africa up for what could be years or even decades of rapid expansion. That Africa is growing off a low level is a reason for investors to be encouraged and is in fact a cornerstone of our investment thesis. Investors who focus not on the absolute level of the starting point but rather on the direction and rate of change will find that Africa scores highly on these later measures.
As African economic growth kicked into high gear a decade ago, the continent’s equity markets responded. Africa’s largest stock market, South Africa’s, rose nearly 200% from 2001 to 2010 while U.S. market was essentially flat. Our expectation that Africa will continue to generate attractive returns for investors is thus not predicated on big changes occurring. We merely expect Africa to remain on its present course.
Africa has what the world needs. Many Africans are very poor, but the continent itself is incredibly rich in natural resources. It has huge untapped energy resources in the form of oil, natural gas and hydroelectric power. Africa also holds over half of the world’s gold reserves, 40% of the world’s platinum and 20% of the world’s uranium as well as vast deposits of diamonds, iron ore, copper, and cobalt. The true natural wealth of Africa is unknown, however, as less than half of its land has even been surveyed.
On top of its mineral and energy wealth, Africa also has a huge swath of uncultivated arable land. According to the United Nations, only about 10% of Africa’s arable land is currently being cultivated and the continent holds more than 60% of the world’s uncultivated arable land. Over the next few decades, Africa will likely transition from a net food importer to a net food exporter.
Foreign direct investment (FDI) is pouring into Africa as more developed countries—notably China—seek to gain access to Africa’s resources. In 2010 FDI exceeded $55 billion, up 500% from the level a decade earlier. FDI not only brings extra cash into Africa, but also infrastructure development. Better ports, roads, rails and telecommunications systems are sorely needed to support further growth, and FDI is helping.
While the populations of the U.S., Japan, Western Europe and China are aging rapidly, Africa’s one billion people are mostly young. In sub-Saharan Africa, up to 40% of the population is thought to be under the age of eighteen. The median age in Africa is about 20 versus 30 in Asia and 40 in Europe. Africa is the youngest continent on earth and as this big bulge of population moves into its most productive years it will create huge demand for a wide array of products. Even now companies in Africa are racing to fulfill huge unmet needs across all levels of society.
As societies become more urbanized, their productivity tends to increase. In Africa now, a marked trend of urbanization is propelling growth as new inhabitants of African cities begin to contribute to the economy. Africa’s large, inexpensive, and increasingly educated labor force is poised to make a strong contribution to the global economy.
- Communications and computing technology is acting as an accelerant in Africa; the growth of mobile phones provides an instructive example. The GSM Association, a group of mobile phone operators, announced in November 2011 that Africa is the fastest-growing mobile phone market in the world, having increased its subscribership 20% or more in each of the last five years. African mobile subscribers are expected to reach 735 million by the end of 2012—up from basically zero a decade prior. In 2001, Nigeria, a country of 160 million, had fewer than 500,000 phone lines in the whole country. Now it has in excess of 110 million subscribers. Africa’s rapidly developing communications infrastructure is a boon to business, as it facilitates supply-chain management, demand forecasting and overall operating efficiency.
Africa is beginning to integrate with the global financial system. Access for foreign investors, while still difficult, is improving. Friction costs—spreads, custody, and trading costs—are higher in Africa than in developed markets, but these costs will decrease over time as trading volumes build. Financial information about African companies is increasingly available outside of Africa as many companies offer their financial reports online and firms such as Bloomberg and ThomsonReuters begin to carry African trading data on their platforms. Global investors now have online access to corporate and government financial information that until just recently was very difficult and time-consuming to access.
For the moment, however, limited liquidity for many smaller equity issues has effectively shut out large global institutions, thus providing smaller investors a clear window of opportunity. But as more companies come to market with public offerings and liquidity deepens, institutions will begin to move into Africa. In ten years many global institutions will be in Africa in some capacity. In twenty years they will all be there.
The Practicalities of Investing in Africa
There are 29 stock exchanges in Africa that represent the equity markets of 38 countries. (Two regional exchanges, one in West Africa (BRVM) and one in Central Africa (BVMAC), serve a total of 13 countries.) With the exceptions of South Africa, Egypt and Morocco, many of Africa’s capital markets are in early stages of development and characterized by a relatively small selection of individual issues and light trading volumes. At present the market capitalization of all of the stocks markets on the continent is approximately $1 trillion, about a tenth of the U.S. equity market. In coming years, we expect to see trading volumes increase as more companies come to the public markets.
Our Investment Strategy
Our Africa Opportunity strategy seeks long-term total return from both income and capital appreciation through active investments in companies that we expect to enjoy profitable and sustainable growth in Africa.
Opportunities in Africa span all economic sectors. Because most African economies are in early stages of development, many attractive investments can be found in basic consumer goods and services. We expect Africans’ disposable income to increase rapidly and therefore seek to invest in industries where that money will be spent. Personal communications, food and beverage, banks, health care and retail are all industries where we expect growing demand. As African infrastructure is being built out, there are also numerous opportunities in the agriculture, construction, telecommunications, energy and mining industries. While there are now many companies enjoying high profit margins in Africa that are suitable for investment, there is also a large list of companies that have yet to come public that will offer as much or more opportunity.
Just as with early investors Asia and Latin America, we believe that investment pioneers in Africa are likely to find the journey challenging and often unpredictable, but ultimately very rewarding in the long run.