In the eyes of the investment world, Africa is widely viewed as complete basket case. Comparisons with Asia-which also suffered the indignities of colonial exploitation on which Africa blamed its many economic failures- is particularly irksome. The World Bank estimates that real income per head in the 48 countries of sub-Saharan Africa between 1960 and 2005 rose on average by only 25%. In East Asia, real income rose 34 times faster. In the 1950s, high tech South Korea was as poor as Ghana and Kenya. Today, South Korea is the world's 9th largest economy -
Africa today evokes images of grinding poverty, natural disasters and appalling infrastructure. Over 70% of Nigeria's 140 million citizens live on less than $1 a day. Congo's infamous child soldiers fight in country wracked by violence. Somalia is a failed state whose civil war is spilling over to Chad. Zimbabwe's Robert Mugabe has taken the mantle from Uganda's Idi Amin as the new millennium's poster child of an African dictatorship. Add to this the region’s world beating political corruption – the most recent example, last week's farcical elections in Nigeria- and its clear why investors want to stay clear of Africa. By all measures, Africa appears to be a colossal flop.
Investing in Africa: The Surprising Good News
"People love China and India, like Asia, are skeptical about Latin America and hate Africa” opined accurately the manager of one of the few African investment funds.
This conventional view, however, is surprisingly inaccurate. Over the past decade, parts of Africa have taken baby steps towards greater prosperity, security and democracy. Snake oil “African socialism” of the 1960s has been supplanted by private enterprise and freer markets. Even Nigeria- today the most corrupt nation on earth is -by conventional standards- a macroeconomic success. Nigeria's annual GDP growth had more than doubled between 2003 and 2006 to an average of 7.3%. Inflation is down to single digits last year. And thanks to boom in oil exports, foreign exchange reserves are approaching $50 billion.
Nor is Nigeria alone. For the third year in a row, sub-Saharan African countries grew on average by 6% and are nudging toward 7% this year. At this rate, Africa's poverty rate will halve by 2015. Take India and China out of the equation, and sub-Saharan Africa is actually growing faster than Asia.
High oil and other commodity prices have provided a much needed tailwind to African growth rates. But here's the surprising news: non-oil producing African countries are recording similar rates of growth. Thanks to pragmatic government policies and an emphasis on tourism, Kenya is one of Africa’s fastest growing economies-despite having no commodities. Zambia's copper exports are complemented by agricultural exports. Africa is even beginning to boast an emerging middle class. In Nigeria, mobile-phone penetration is 8% and rising fast. Optimists hope that a combination of debt forgiveness, improving infrastructure, and accumulated financial reserves have combined to create a momentum that could keep going even after the commodity boom turns.
Investing in Africa: Making a Mint in the Stockmarkets
Another surprise: the handful of few investors who can access African stockmarkets are making a mint. Between 1995 and 2005, African stocks showed compound annual growth of 22%. Last year, the stock market in Kenya rallied 46%, and the local index is up 9x in dollar terms over the past ten years. In 2006, equities in Morocco were up 75%, 69% in Uganda, and 55% in Botswana. Nigeria's stock market's capitalization has doubled over the 12 months to about $45 billion.
How is this all possible? Turns out that African companies are some of the most profitable and fastest growing in the world. Ditto mutinationals that dare to do business in teh region. Consider the case of Millicom International (MICC), a Luxembourg based mobile phone company that has proven its ability to make money hand over fist in some of the toughest markets in Africa. Skeptical? The stock is up a whopping 89-fold since 2002. And it has a long way to go.
Turns out the very reasons not to invest in Africa – political uncertainty, corruption, poor infrastructure – mean that the firms that do succeed are some of the savviest around. Yet thanks to the “Africa discount,” indiginous African companies trade at half the levels of the Western counterparts.
Investing in Africa: China Yet Again
While much of the West ignores Africa, the Dark Continent has a new eager suitor in China. China’s president Hu Jintao recently set off on an eight-nation tour through Africa, promising of $3 billion in soft loans and a doubling of Chinese aid by 2009. In the last 12 months alone, China’s leaders have visited 48 African nations.
China's efforts are not borne of feel good development policies, but of pure economic self-interest. China needs Zambian copper, Nigerian oil, Tanzanian timber and South African platinum to achieve superpower status. The Chinese strategy is built on largess- a savvy exercise of “soft power.” Chinese investment has paid for roads in Ethiopia; financed the building of 100
schools and 30 hospitals in Liberia; rebuilt Angola’s once-famous Benguela railway; and set up a road-building program in Mozambique. Chinese investment has already revitalized large parts of Africa and parts of Africa have much better infrastructure than they did just a few years ago.
And China's efforts are paying off. Trade between China and Africa soared 40% to a record $55.5 billion last year. Direct investment has reached a cumulative $6.5 billion. A whopping third of Chinese oil now comes from Africa.
Investing in Africa: The Last Great Opportunity
Africa is widely perceived as poor and corrupt. But the best investment opportunities lie where perception differs from reality- where things aren't as bad as they seem. Africa fits that bill perfectly. It's hated, it's undervalued, it's difficult to invest in. It reminds me of how much of how former Communist Eastern Europe and Russia were viewed in the early 1990s. As Hermitage Capital founder- and Russia's largest investor- Bill Browder observed: “Russia is sh*t. But as long as it gets a little less sh*tty, I make a lot of money.” That's why his investors have made 25x on their investment money in the last 10 years- and Browder walked away with over $160 million in 2006 alone. If that's not an incentive to look at Africa, nothing is.