Africa’s growth potential offers untapped long-term returns

  • Written by  Bassel Khatoun

When thinking about investing in Africa, many investors identify SA as the most important market on the continent. However, we believe other countries also offer much untapped long-term potential.

Among frontier markets globally, Africa offers one of the most exciting investment stories. But investors may need to be patient and understand some of the unique aspects of doing business in those markets, as well as the risks.

As global demand for hard and soft commodities continues to grow, Africa is in an enviable position with its vast natural resources. Many African markets not only boast significant supplies of oil, gas and hard commodities but also have the means to expand the production of soft commodities.

In the past few years volatile commodity prices have presented a challenge for African countries, particularly those dependent on oil revenue.

Commodity exporters faced substantial challenges after the dramatic oil price declines in 2014 and depleting fiscal buffers, which affected growth. However, that volatility could also be viewed as an opportunity, as these countries recognised the urgent need to reform and diversify their economies.

It forced governments to become more disciplined and improve income collections. Volatility also encourages countries to find ways to expand their economies through more diverse ventures.

We are seeing several large multinational companies establish a presence in Africa for the first time — particularly in countries with improving infrastructure and ease of doing business — to access its large, vibrant and youthful populations.

China’s influence, in particular, is increasingly apparent, especially in financing the building of roads, ports, airports and tunnels. The Chinese are becoming local partners with businesses. While Africa’s commodities are of interest to China, many business owners are setting up their own retail outlets.

One market in which we’ve identified a number of opportunities is Kenya, which over the past decade has made significant structural reforms that have driven economic growth.

Kenya’s position on the fast-growing east coast of Africa allows it to act as a hub for trade and investment flows from the east into the rest of Africa. Exports, predominantly tea and horticultural products, have recovered strongly. Tourism is also rebounding strongly.

Despite GDP growth slowing to 5.5% in 2017 because of subdued credit growth, a prolonged political impasse and drought, Kenya’s economic growth has accelerated to about 5.8% and is expected to reach 6.1% in 2018, with the adoption of prudent macroeconomic policies and strengthening consumption.

The pursuit of progressive monetary, fiscal and exchange rate policies have to helped stabilise and safeguard the economy. A diverse economy driven largely by services also provides resilience to exogenous conditions and the potential to be one of Africa’s strongest growth stories.

Kenya’s infrastructure is likely to benefit from China’s One Belt One Road initiative, which aims to transform Chinese economic and diplomatic interests. In 2014, China established a multibillion-dollar fund to finance infrastructure projects along the One Belt One Road routes. In Africa, that includes the port of Nairobi in Kenya.

Kenya is also at the forefront of the mobile banking revolution, which is overhauling financial services in Africa. A success story that is touted globally is a cellphone-based money transfer and financing service in Kenya that has a growing subscriber base and has enabled unbanked and underbanked users to have a secure means of remitting and receiving funds.

The system has grown dramatically to 28.6-million registered customers since its founding in 2007, with a corresponding exponential growth in the value of transactions. The value of transactions equated to about 80% of Kenya’s GDP as at March 31 2016. As a result, mobile banking has spread rapidly to many other countries in the region, substantially boosting financial inclusion.

Cellphones are also connecting users to other sectors of the economy such as retail, education and healthcare, leapfrogging the need for traditional brick-and-mortar assets and linking to the burgeoning population in emerging markets.

The potential for long-term growth in consumer-related areas is also very attractive, and we have identified potential opportunities in the brewing industry in Kenya.

General consumption patterns in East Africa suggest some attractive growth potential. The per capita beer consumption, for example, is lower than in SA or other emerging markets but is expected to be one of the fastest-growing markets over the next decade due to rising economic development and urbanisation.

It is understandable that SA should remain prominent in investors’ minds as they survey the opportunities across Africa. Recent macroeconomic indicators, including GDP growth and an interest rate cut in March, have been broadly positive. And we are pleased to see the democratic process has remained intact.

But it is not the only story in the region. Africa as a whole is expected to grow more than 5% annually in the next 20 years, due to an improving investment environment, better economic management and China’s rising demand for Africa’s resources.

More than 100 African companies have revenues in excess of $1bn. Africa also has impressive stores of resources, not only in minerals but also in food — 60% of the world’s uncultivated arable land is found in Africa.

The potential for long-term growth in consumer-related areas is also very attractive, with about 1-billion inhabitants on the continent. More importantly, Africa is expected to account for 3.2-billion of the projected increase in the global population by 2100, with its working-age population increasing by 2.1-billion. This demographic dividend not only provides the opportunity for transformative growth but has implications for consumption globally.

A number of African markets have the potential for strong economic growth, which should produce an environment favourable to corporate profitability and earnings growth.

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