By Charlie Henneman, CFA
When confronted with the prospect of investing in Africa, a seasoned US or European investor might be tempted to draw upon a quip that responds to the notion of Africa as "the market of tomorrow" with a comeback that "it always will be."
To the outsider, Africa has sometimes looked like a get-rich-quick scheme, where fortunes might be made in mining and oil but where money also disappeared down whirlpools of conflict and corruption. Wasn't it only in 2000 that the Economist called it "Hopeless Africa"? For decades, it hardly seemed the sort of market in which a responsible investor might put his client's money in with a straight face.
But there are signs that things may be changing in Africa, according to Clifford Mpare, CFA, chairman and CEO at Frontline Capital Advisors. Mpare, who spoke before more than 200 investors during a breakout session at the 67th CFA Institute Annual Conference, calls Africa's growing equity markets a "lion market."
"We talk of bull and bear markets because the bull is a powerful, hard-charging beast, and the bear is a grouchy, ponderous animal, but the lion's survival is based on aggression. It must hunt and kill in order to eat, and its existence is one of feast or famine, which is a good analogy for Africa's volatile equity markets," he said.
For years, the Africa story has been a natural resources play, closely tied to Asian growth and the resulting "commodities super-cycle," and there's no question that Asia's demand for Africa's resources has been a major contributor to African growth since 2000. But Mpare said that the investments of capital and engineering skill in support of resource extraction have planted the seeds for future growth in manufacturing, logistics and a nascent service economy for a growing African middle class.
According to Mpare, who in 2007 started Frontline Capital in his native Ghana after a successful investment career in North America, a number of trends are converging to brighten the economic picture for much of the continent, which now counts 29 equity markets with a market capitalization of more than $1 trillion. The combination of favorable demographics, improving labor productivity and urbanization suggest Africa may finally be on a path of industrialization.
"After two decades of negative labor productivity, we're seeing improvements since 2000. I think the turn to positive labor productivity marks an important inflection point for Africa," he said. "We now see an increasing entrepreneurial spirit and calls for reform across the continent."
Perhaps this accounts for the Economist changing its tune and calling Africa "A hopeful continent" in a 2013 special report.
Mpare said the economic development of the "Asian tiger" economies provides lessons to African leaders about the prerequisites for growth: political stability, lowering the risk of capital flight by avoiding excessive debt, and infrastructure investment to support economic activity.
Investments in African infrastructure construction have already made Dangote Cement the biggest company on the Nigerian Stock exchange (and made its founder Aliko Dangote the richest man in Africa), but Mpare sees continuing infrastructure investment as a key theme in the Africa thesis.
Urbanization rates in sub-Saharan Africa now lead the world at nearly 4% a year, and Mpare cited estimates that sub-Saharan Africa needs nearly $100 billion in annual infrastructure investment just to keep up with demand for power generation, communications infrastructure, and improvements in agricultural infrastructure.
But it's the development of more complex economies across the continent that has Mpare's attention, as such countries as Kenya and Ethiopia develop more manufacturing and service industries. African countries now account for 10 of the top 11 forecasts for expected GDP growth by 2020. Mpare said these countries' ability to leapfrog to state-of-the-art technologies has contributed to these forecasts, citing mobile phone penetration that's grown from 1% in 1998 to 50% today as one example.
As promising as the growth thesis may appear, Mpare was quick to acknowledge that Africa still presents many challenges for investors. Although suggesting that African markets are largely uncorrelated with other global markets and therefore have a place in the diversified global portfolio, Mpare noted that the major African indices are still dominated by state-owned industries and would not be the best entry into the market. He said investors should access local markets directly and with a long investment horizon.
More than once during his talk, Mpare said he thinks the biggest risk for investors is likely to be the impact of policy changes by the Federal Reserve in the United States.
"US rate tightening in the 1980s and 1990s triggered crises in Latin America and Asia, so there are questions about what the impact of a Fed taper might be on African markets," he said. "I don't know what will happen to African growth in a rising-rate environment." He cited a slowdown in China and the resulting impact it would have on commodity prices as another potential risk.
"I suggest you visit before you start investing in Africa," he said, adding the private equity might be the best approach to riding out the likely volatility that investors will experience. "At the moment, there's not a whole lot of difference between public and private equity in Africa, but private equity more easily allows the longer time horizon" that is essential when investing in frontier markets, he said.
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