Why Invest in Africa? The Big Picture

While the last couple of years have been tough for African equities and currencies, we believe the long-term case for investing in Africa remains intact. The worst commodities bust in a generation, the strengthening of the U.S. dollar and indigestion in frontier and emerging equity markets have left many African stocks trading at valuations not seen in years.

However, Africa is still at extremely low levels of per-capita economic output relative to the rest of the world and is still in the very early stages of its long journey to becoming a middle-income continent. While the decline in commodities prices has applied the brakes to growth in the most resource-dependent African countries, we believe the continent remains on a multi-decade upward trend.

Strategic, long-term oriented investors with a knowledge of and affinity for Africa should look over the valley of the continent’s current challenges and consider establishing (or increasing) investment positions at today’s compelling prices.

Here are five key considerations for Africa investors:

1. The commodities boom is over. As commodities prices have fallen over recentyears, many resource-dependent countries in Africa have suffered. Now, with the boom over, one can invest in profitable, fast-growing African companies that are doing well of their own accord—not because they are being temporarily supported by commodity prices riding at cyclical highs. The commodities bust is hardly the end of the road for Africa. Those not familiar with Africa tend to think of it as primarily a commodities exporter. While this characterization was more or less accurate two decades ago, it is not anymore. With each passing year, the mining and energy industries play an ever-smaller role in Africa’s overall economy, while infrastructure and the consumer-facing industries grow robustly. Moreover, the commodity price weakness is not uniformly negative for Africa. While low energy and minerals prices are certainly problematic for countries such as Nigeria, Zambia and Angola, they are arguably a benefit to countries such as Kenya and Tanzania that are net importers of materials and energy.
2. Equity valuations are attractive. Equity valuations in Africa are more attractive now than they have been in years and one U.S. dollar can buy significantly more value than just a few years ago.
3. Economic growth has slowed for now but will likely rebound. Sub-Saharan Africa will likely slow to still-respectable 3% GDP growth in 2016, primarily due to low commodity prices and tighter financing conditions. However, medium-term growth drivers—an improving business environment, favorable demographics, growing financial inclusion and political progress—are still largely intact. We expect growth to perk back up to its historic rate of 5%-6% in the coming years.
4. Improving infrastructure will be a boon to growth. The infrastructure pipeline in Africa is robust, with many projects in various stages of development that will improve transportation efficiency and the availability of power. The World Bank estimates that Africa needs to commit $100 billion annually over the next decade to fill its infrastructure gap. To be sure, there is a nearly limitless list of needed and useful infrastructure projects that could be undertaken in Africa, and projects take years to plan and complete. However, with each finished project Africa’s economic capacity expands.
   

   School Children in Gambia

5. Attractive demographics will bolster growth in coming decades. Africa is by far the youngest continent in the world, and its economy will be bolstered in coming years by the hundreds of million of Africans who are still decades away from their point of peak spending. One reason for today’s low (and in some cases, negative) interest rates in the developed world is that it is very hard to spur additional consumption from an aging population. The world, overall, suffers from stagnant aggregate demand. Africa, on the other hand, has a young, urbanizing and increasingly well-educated population that will support demand in the coming decades.

Africa today consists of fifty-four countries—each with its own strengths and weaknesses, its own opportunities and challenges. The continent is huge and diverse and defies simple labels or descriptions. Africa has many formidable challenges ahead, including job creation, improving transportation and power infrastructure, developing manufacturing capacity and increasing agricultural production. But it is in the efforts of countries and companies to address these challenges where investors will find opportunity. We believe that as it has before, Africa will recover from its current challenges and continue on its upward economic trajectory.
Source: Africa Capital Group