Investment Adventures in Emerging Markets

Africa: Investing in the Cradle of Civilization: Part 2

Africa is well known for its wealth of natural resources, which includes oil and gas, a variety of metals and minerals as well as huge tracts of agricultural land. These riches have attracted global investors, most notably from emerging market countries such as China, India and Brazil.

Many of these investors have been seeking raw materials for their own economic development and markets for their industries. In return, many African countries have been receiving vitally needed infrastructure such as transport links, power stations, schools and hospitals, which brings into play another great African resource: a huge and youthful population.

Mark Mobius in Africa
Mark Mobius in Africa

More than a billion strong and with a median age of just twenty1, the population of Africa has been seeing prospects and productivity transformed by education, mobility and access to capital resources.

The effects of this virtuous circle are evident. Between 2001 and 2010, six of the world’s fastest growing economies were in Africa.2 Over the next five years, the International Monetary Fund is forecasting gross domestic product growth in excess of 5% for sub-Saharan Africa, as a whole.3

For the reasons outlined above, I like the consumer and commodity story on the continent.

In the infrastructure space, opportunities for investors are scarce since most infrastructure development is under government auspices and has not been privatized.  However, companies that supply heavy equipment and supplies such as cement would be possible investment opportunities.

The banking industry in the continent is of particular importance, not only because of the rise of microfinance, but because of the growth of banks and their move into consumer banking. 

In Nigeria, banking reforms have triggered a wave of consolidation, creating many well-managed and financed banks. Elsewhere privatization and stock market quotes for state enterprises could transform stock market liquidity and expose the businesses themselves to more modern management practices.  

South Africa is a usual favorite among many investors on the African continent. It is a broad, deep market and some of the investment challenges related to liquidity and general transparency are not as great there as they are in other African markets.

Consumer companies in South Africa include consumer product companies and consumer service companies—such as consumer banks and insurance companies—as well as companies in the telecommunications field. As we research these investment opportunities, I look for companies that appear to be in a good market position and have good management that respects shareholder rights. 

In terms of growth potential, I believe Nigeria offers one of Africa’s most attractive markets, along with Kenya and Ghana.

I consider Africa to be an important investment destination but investing there—or anywhere, for that matter—is not without its challenges.

Inflation is a particular concern in certain countries, most notably Nigeria. But in most of Africa, inflation is less of a worry, and in some cases it has even been declining. 

Political instability is another concern, and with the Kenyan elections postponed until March 2013 many are wondering if they’ll see a repeat of the violent aftermath following the 2007 presidential election.  I’m not overly concerned, because based on what I am seeing and hearing, the body politic in Kenya is very aware of the tremendous damage such violence does to all sides, and recognizes that it runs counter to the desire of the population locally and across the continent to see a rise in their living standards. This is an important incentive to refrain from violence.

What we would like to see in Africa is more liquidity. Exchanges could do that by making listing as easy as possible for qualifying companies. 

Most important, we believe governments must move forward to privatize government-owned companies and facilitate listing.  Benefits we would likely see for the companies include an increased profile and easier access to finance. Public reporting can be beneficial to companies, too, as it encourages them to adhere to high standards for managing business.

While I continue to keep tabs on these challenges, I believe the long-term outlook for Africa is positive. With abundant natural resources, a young population, and heightened interest from rich emerging market countries, it will be interesting to watch how the economies in the cradle of civilization might grow.

1United Nations 2010

2 The Economist


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