Africa: The Last Frontier For Investors?

Yes, argues Stan Luxenberg of Merrill Lynch, who writes that Africa is now where China and India were 10 years ago (hat tip: Africa Unchained). "Investors who think even cursorily about Africa tend to dismiss it just as quickly. The continent is home to the world’s 25 poorest nations, according to the United Nations Human Development Report. School systems in many countries are weak or nonexistent, and AIDS continues to devastate entire regions. Infrastructure is often rudimentary, malnutrition is common, and the threat of war hangs over many countries. Yet to be put off by Africa’s enormous problems is also to miss the considerable progress being made. Since 2001 Africa’s economies have grown 5% annually, which is better than the world average of 4.2%, according to the International Monetary Fund. The IMF expects the pace to quicken, with growth averaging 5.6% through 2012, compared with 4.8% elsewhere. What’s more, those aggregate numbers shortchange many countries far ahead of the continental curve."

Mr. Luxenberg continues: "That nascent demand, in turn, is fueling growth in companies listed on the continent’s 20 stock exchanges. Markets range from South Africa’s, with more than 200 companies, to those in Tunisia and Mauritius, with around 40 listings. And the equities trading on these fledgling exchanges have generally performed well. The market capitalization of listed sub-Saharan companies has climbed from 89% of GDP in 2000 to 137% in 2005, according to the World Bank. That suggests a sharp rise in the valuation of African equities. Some emerging-market mutual funds have been buying African stocks, but most institutional investors have ignored the continent. One reason, according to a Merrill Lynch study, is that few brokerage analysts follow even the top African companies. That contrasts with the keen interest they show in emerging markets in Asia and Latin America. While every major company on the Chinese and Indian exchanges may be followed by as many as 30 analysts, an African stock does well to catch the attention of five. But equities in more popular Chinese and Indian markets are also much pricier than African shares."

In a section titled, "Why Africa Makes more Sense Now", the report states that a portfolio full of safer investments, a small allocation to Africa can provide diversification and long-term financial rewards: "Like most newly emerging markets, Africa embodies both promise and risk. That combination has been kind to investors in recent years, but caution is the watchword in the current global economic climate. So what role could African investments play in a well-balanced portfolio? Investors hoping for quick profits should probably look elsewhere. 'Over any short-term period, African markets are likely to be very volatile,' says Michael O’Keeffe, Head of Investment Management & Guidance for Merrill Lynch’s Global Wealth Management. 'And African stocks are therefore most appropriate for investors with a long-term investment horizon.'....If an investor decides to invest in Africa, O’Keeffe suggests building a small position over time—say, 1% of the investor’s overall portfolio. That can help avoid making a large investment just as stocks reach a cyclical peak. Investors accustomed to picking individual stocks will find an increasing number of opportunities in Africa. In addition, more mutual funds and exchange-traded funds are expected to be introduced—and for those venturing into fledgling African markets, a fund’s professional management and broad diversification can be important pluses."

With beautiful graphs, the report shows that the sectors driving growth in Africa are the financial sector, oil production, diamond production, telecom, and agriculture.

It offers caveats. "'Before investing in any African country, it’s important to have a clear idea of the political situation,' [Stephen] Hayes [president of the Corporate Council on Africa, a trade group in Washington, D.C. that represents U.S. companies] cautions. 'There are several, particularly Eritrea, Central African Republic and Zimbabwe, that don’t make sense right now. But others, such as Tanzania, Namibia and Mozambique, are open for business.' Rapid population growth further complicates the investment outlook. According to the UN , the number of people in sub-Saharan Africa will rise 2.2% annually through 2015. That compares with 1.5% growth in South Asia and a drop in population in central Europe. The increasing population could provide economic stimulus. By 2015 the number of Africans under the age of 15 will rise to 42%. If those young people find jobs, their spending could jump-start economies. Such a workforce could also attract companies in the developed world that are looking to outsource their operations. Much depends on whether African countries bring about further political and legal reform, and there are some positive signs. According to a World Bank study, corruption is now less of a problem in sub-Saharan Africa than it is in the countries of the former Soviet Union. Many African nations have also begun building foreign currency reserves, which should help hold down inflation, and money from commodity sales is being used to pay down the debt of companies and countries."

My response: These figures re: Africa probably help explain why Robert Johnson (founder of Black Entertainment Television) has been visiting Africa in search of investment opportunities - and plans to plug $30 million into various Liberian investments - and is urging other black American investors to consider Africa as well.