Africa: No Longer A Leap Of Faith

Via The Financial Times, a report on Africa’s promising investment potential in the eyes of many:

Even before the financial crisis caused havoc in most of the developed world, investors have long talked up Africa’s potential for growth.

Now, finds a survey by the Abu Dhabi Government, they’re set to follow with their wallets. Of 158 institutional investors, more than half believe Africa will be the most attractive region for investment growth in the next decade. What’s more, all respondents expect to have some exposure to the continent by 2016.

“Africa is no longer a leap of faith” say the survey’s conductors: Invest AD, a investment company owned by Abu Dhabi’s executive council, and the Economist Intelligence Unit, part of the Economist Group. “These are still early days but there is no doubting the promising signs, politically and economically.”

Of course Invest AD are bullish on Africa – they are investment specialists with a keen interest in the region. But the involvement of the EIU shows that this is more than sales puff – it’s a credible survey that is worth taking seriously.

The following charts from the report show the key findings:

Question: “What is your current allocation to assets in Africa’s frontier markets and what do you expect in three [not shown] and five years?”

“Africa’s frontier markets will offer the best prospects for investment growth of anywhere in the world in the next decade.”

Few analysts will be surprised that Africa is generating more investor interest, of course. While the world’s established economies have floundered and rapidly emerging markets like China and India show signs of slowing, the continent has some of the world’s fastest growing countries, a population of nearly 1bn, and contains 10 per cent of the world’s oil reserves and bountiful mineral stocks.

But this survey does draw some particularly promising conclusions. For one thing, it eases fears that Africa’s growth prospects cling to hopes that global commodity prices remain high.

When asked to rank the three best reason’s to invest in Africa, 34 per cent of respondents cited commodity prices. But even more – 39 per cent – named the growing consumption of the continent’s middle classes, now more than 300m people.

Meanwhile, fears about Africa’s political and macroeconomic climate are not as potent as they might have been a decade ago. Other than corruption, the chief risks cited by investors are more technical market concerns, like weak institutions and illiquidity in capital markets. These are impediments, certainly, but not nearly as formidable as past worries about the continent’s stability.

Volatility is a problem. One worry is that turbulence in Africa’s equity markets is exacerbated by conditions elsewhere in the world – its stock indices suffered a torrid 2011. But could also be an opportunity to pick up cheap stocks, points out Invest AD.

When turmoil sets in, investors globally flee towards perceived safe havens. On the flip side, as many investors are quick to point out, the flight from risk has left a significant mismatch in valuations, meaning that otherwise promising stocks are potentially trading very cheaply. This is a strongly held view: about seven in ten investors agree that reluctance among portfolio investors to target Africa’s frontier markets gives them a greater opportunity to profit. And appetite for a greater weighting in these markets is notably higher among firms that already have some allocation there today.

There is also a welcome side effect of this volatility: because returns fluctuate wildly in Africa’s frontier markets, 64 per cent of investors say that investing long-term, rather than short-term speculation, is the way to go.

Nazem Al Kudsi, chief executive of Invest AD, said the survey showed that these frontier economies are “rapidly becoming the Brics of the future”.

Here’s his take:

Interestingly, the  survey suggests that investors are largely drawn by the same “income convergence” story that has played out in China and India –not the worn, one-dimensional motivation of mineral extraction. The emergence of a strong middle class… is fuelling demand for all sorts of products and services, from mobile banking to canned drinks. As investors see the potential for high returns in such ventures, they will commit capital, which in turn creates jobs and helps lift incomes. This virtual cycle has played out in Asia and Latin America in recent years. It is now Africa’s turn for an economic lift-off.

An economic lift off that would have a plethora of social benefits, according to the investors surveyed. Nearly three quarters said the development of Africa’s capital markets would help in its fight against poverty.

This entry was posted on Tuesday, January 24th, 2012 at 4:07 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.