By Usman Hayat, CFA
Africa has its challenges, from corruption to political risk, yet the continent has changed and will continue to evolve. And once investors consider the impressive facts about the growth and transformation of Africa's economies, their fear and pessimism about investing should dissipate. Those were the key messages that emerged from a panel discussion entitled Emerging Markets - Spotlight on Africa, moderated by Bloomberg Television's Manus Cranny, at the Sixth Annual CFA Institute European Investment Conference in London.
Speaking first, Charles Robertson, global chief economist at Renaissance Capital, highlighted the change theme. His view is that GDP growth knows no barriers, be they climate or ethnicity. Nobody expected the growth that China and India have experienced, and he argued that, in similar fashion, Africa's GDP will cover a lot of distance in catching up with the rest of the world. Ten African countries have achieved at least 7% annual growth since 2000, he noted, enough to double GDP in about a decade. This growth is the result of public and private sector debt, increasing foreign direct investment, favorable demographics, rising education and reforms that have made doing business easier.
Robertson dismissed as "nonsense" both past and current economic forecasts of Africa's per-capita GDP, contending that most economists extrapolate past data without sufficient analysis. A better way of analyzing economic growth is to study the path of similar countries. India, for example, once had an annual growth rate of about 2% but of course that growth rate later exploded. Robertson believes Africa is copying India's trajectory with a lag.
One positive factor has been an improving political environment. Robertson said that most Africans now live in democracies, and political leaders are trying to deliver what voters want. He reminded the audience that, in 2000, the cover of The Economist called Africa "The Hopeless Continent." But 12 years later, the British newspaper had changed its tune considerably with a new cover line: "Africa Rising." Only a few years ago the richest person in the world with African heritage was African-American TV celebrity Oprah Winfrey. Now that title goes to Nigerian entrepreneur Aliko Dangote.
What about corruption in Africa? The degree of corruption, according to Transparency International's Corruption Perception Index, is strongly and negatively associated with the degree of income as measured by per capital GDP. Robertson stressed that African countries have a lower level of corruption compared to some countries with similar levels of income. The way out of corruption is to get rich, and the way to get rich is to invest, he said. "There is a great opportunity to deliver a better performance in the coming 40 years than Asia achieved over the last 40 years," Robertson contended.
Next up: Tendai Musikavanhu, CFA, co-founder of One Stone Capital Group and Old Mutual Global Index Trackers, who took to the podium with a powerful message: fear about investing in Africa is imposing an enormous opportunity cost on investors. Using data from MSCI indices, he pointed out that $100 million invested in emerging markets in December 1987 would be worth $1.8 billion today, compared to just $400 million if the money had instead been invested in developed markets in Europe, Australasia and the Far East. The cost of more than two decades of pessimism and fear clocks in at about $1.4 billion. Yet in the case of Africa, in particular, "markets are significantly ahead of the developed markets and not far behind frontier markets in terms of long-term, risk adjusted returns," Musikavanhu contended.
Indeed, according to data from the International Monetary Fund, Musikavanhu added, "28 African countries are ranked in the top 50 emerging and developing economies according to real GDP growth projected for 2017." And African markets still have the lowest correlation with other markets, thus offering the best available diversification.
Demographics are favorable. By 2040, Africa's workforce will surpass that of India and China - becoming the largest in the world. Musikavanhu joked that in the United States, a 40-year-old is classified as middle aged, but in Africa the population is so young that "middle aged" works out to be about 19 years old.
He favors a buy-and-hold, passive approach to investing in Africa for several reasons: First, because of relatively limited liquidity - a buy/sell round trip at constant prices might cost as much as 300 basis points; second, because African stock markets typically do not allow shorting; and third, because benchmarks offer some built-in risk management by weeding out the most problematic markets.
Clifford Mpare, CFA, CEO of Frontline Capital Advisors and the final speaker in the session, echoed many of the same bullish themes. He noted that total stock market capitalization in Africa rose from $113 billion in 1992 to $1.05 trillion in 2010. Yet with 15% of the world's population, Africa still controls less than 3% of global GDP. As the continent catches up, opportunities abound for investors: A rise in GDP (purchasing power parity) from $1,000 to $5,000 can lead to a ten-fold increase in the stock market, he argued.
Infrastructure, in particular, is in need of investment capital, from power generation, transmission lines and road networks to waste removal, mobile telephony and public-access broadband. Telecom, in particular, has been a big driver of per-capita GDP across Africa. Mobile phone penetration checks in at more than 50%, up from just 1% in 1998.
Political conditions across the African continent are improving. Mpare noted that of the 91 countries that recorded gains on the Heritage Foundation's well-known Index of Economic Freedom, 71 are developing or emerging - and of those, 23 are in the Sub-Saharan Africa region, compared to 16 in Europe and 15 in the Asia-Pacific region. African countries scoring higher than the average of 59.6 on the Index include Botswana (70.6), Rwanda (64.1), South Africa (61.8), Ghana (61.3), Namibia (60.3) and Burkina Faso (59.9).
So what did attendees make of the investment opportunity in Africa? Using live polling technology, moderator Magnus Cranny queried the audience of senior investment professionals from 37 countries both at the beginning of the speaker presentations and the end. As shown below, most delegates view lack of information, adequate regulation and market infrastructure as the biggest barrier to investing. After listening to the presentations, attendees seemed to materially changed their outlook on corruption.
|Live Polling Results: What is the Biggest Barrier to Investing in Africa?|
|First Poll||Second Poll|
|Lack of information, adequate regulation, and market infrastructure||46.7%||53.3%|
|Poor perception due to past crisis||4.8%||13.6%|
|Unavailability of large investments||7.3%||13.0%|
|Weak means of resolving commercial disputes||4.2%||1.2%|
|Number of delegates who participated in poll||165||169|
What are your views on the largest barriers to investing in Africa?