Ever heard the phrase “Africa is not for sissies”? Having been born and raised in South Africa, I’ve certainly said it many times — we tend to think it takes a certain amount of “toughness” (perhaps a little braggadocio?) to survive and thrive in the world’s second-largest and second-most-populous continent. But I have to admit that in doing so, I’ve probably helped perpetuate the cliché of Africa as “the Dark Continent,” where peril lurks everywhere.
Yet if there was one takeaway from a recent session by Melissa Cook, CFA, on investing in Africa at the 60th Financial Analysts Seminar, it was that investors need to pushback against those who say “Africa is too risky.”
“It is not a story of death and despair as portrayed in the media (‘if it bleeds, it leads’),” said Cook, founder and managing director of African Sunrise Partners and a member of the President’s Advisory Council on Doing Business in Africa. “Africa’s good stories tend not to get any coverage.”
Investors need to develop a new frame of reference for Africa, she added, as the continent is comprised of many countries and opportunities. In fact, there are 54 separate countries, each with its own story, and yet “too many people still think it is one country,” Cook said. “When people talk about Africa, you have really got to start drilling down a little bit more into themes and regions and countries.”
Cook’s comments in Chicago came just days ahead of a summit of entrepreneurs in Nairobi where US President Barack Obama also talked up the merits of the continent.
And with good reason: one of the aims of Obama’s Africa visit was to boost American business and trade across the continent. (Africa is a fertile battleground for the world’s economic powerhouses: In 2009, according to Reuters, China overtook the United States as the continent’s biggest trade partner. China’s economic ties with Africa have skyrocketed in recent years, with two-way trade in 2013 — the last year for which figures were available — hitting a record $200 billion, mainly in Chinese imports of African oil, copper and other raw materials, the AP reports. US trade with Africa, meanwhile, fell to $85 billion in 2013.)
“Africa is on the move!” Obama said at the Global Entrepreneurship Summit in Nairobi, Kenya. “Africa is one of the fastest-growing regions in the world, people are being lifted out of poverty, incomes are up, the middle class is growing, and young people like you are harnessing technology to change the way Africa is doing business.”
Donald Gips, co-chair of the Africa Business Initiative at the US Chamber of Commerce,told the Financial Times that “major American companies and funds are realizing that the opportunities in Africa are significant — particularly given growth rates that are shaping the continent. These are largely new markets for the US and the visit [from Mr. Obama] is a very big step: US business will follow in the wake of it.”
Whether or not US business interests will follow remains to be seen. But Cook’s message to the FAS delegates was clear: As an investor, you should do the research and formulate a deliberate strategy as the continent is too important to ignore.
“Africa matters and will drive global growth for decades,” she said. “It is the battleground for China-US competition in an awful lot of really important sectors and is a new source of earnings and returns for companies that can get the right positioning.”
In Africa, demand is greater than the supply for everything, and someone is filling that supply, she noted.
“The competition is already fierce. You go to these markets and it’s not like people are sitting around saying: ‘You know, I wish an American electrical equipment company would come over here and sell us some light switches.’ They are finding light switches from somebody and it isn’t us,” she said.
Cook acknowledged that Africa is “not the easiest place to go” as an investor, but said there was too much of an attitude of “we can wait,” or “the markets are too small.” By the time companies try to get there, it’s going to be too late, Cook said.
“Making accidental [investment] decisions based on no knowledge is a very risky approach, so companies that say, ‘Africa is too risky,’ well, if you make decisions on not knowing anything you are actually taking a much bigger risk than if you go and do the work and understand it.”
Consider the demographics:
More than 1.2 billion people and growing at more than 2% a year
43% are under the age of 15
Rising education levels and many people who are tech-savvy
Voters are starting to hold politicians accountable: Deliver or be voted out! (Nigeria’s recent presidential election and smooth transition of the reins of power is a good example.)
In brief, why Africa, why now?
Improving governance is one of the biggest changes. Nigeria’s election, Cook said, shows what happens “when voters have skin in the game.”
Urbanization and the rise of a middle class. “You have lots of people moving into the cities, but the urban planning and infrastructure has not kept up. So that’s an area where I think a lot of governments and private sector companies are going to start putting money to work.” (Note that some foreign companies are deciding that Africa’s middle class is not the large, dynamic market they had hoped for. Nestlé, the biggest food and drinks company, for example, recently said it was cutting 15% of its workforce across 21 African countries because it had overestimated the rise of the middle class.)
Infrastructure upgrades are happening and the Chinese have had a lot to do with this. “The Chinese construction companies need new markets because the growth at home is not quite as strong as it used to be.”
Agriculture as a business is a very big deal. “About 70% of Africans earn their living from agriculture and most of them are barely at the subsistence level,” Cook said. “If they have a good year, they have extra produce or seeds to sell, but they are selling at the same time as everybody else and get a poor price. So we are starting to see much more for-profit-oriented investment. This is a critical underpinning of the long-term middle class consumer story.”
Technology leapfrog. Mobile phone usage is exploding in Africa. It’s not about copper wire phone lines; it’s now all about fiber and wireless broadband networks.
Financial inclusion: Mobile money is one way this is happening (for example, in Kenya).
Globalization: It’s the end of Africa’s isolation from world markets.
That’s not to say there aren’t risks, including:
Capital flows in/out of illiquid markets;
Possible increase in political instability;
Commodity price shocks (e.g., the China slowdown);
Climate change and its effect on water, agriculture;
Disease as a drag on productivity — malaria being the biggest one.
In Cook’s view, however, the biggest risk is not being invested in Africa in the first place.
The article was published on CFA Institute under blog section and the author of the article is Lauren Foster, the content director at CFA Institute. Lauren Foster is a content director at CFA Institute, where she focuses on private wealth and behavioral finance. Previously, she worked as a freelance writer for Barron’s and the Financial Times. Prior to her freelance work, Foster was an editor and writer for the FT, where she covered wealth management. She holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University. Topical Expertise: Behavioral Finance · Private Wealth Management