By Sonal Tanna
The investment case for Africa is simple: it is one of the fastest-growing regions in the world, but one of the most under penetrated for investment.
Africa is arguably the last ‘frontier’ – both for its growth and its investment potential as it pursues established emerging markets status. The same fundamental developments that occurred in the current emerging markets in the 1980s and 1990s are taking place in parts of sub-Saharan Africa today – growth is taking off, the private sector is becoming a greater driver of that growth and financial markets are opening up. Globalisation has clearly also played a key role.
The investment case for Africa is based three pillars – demographics, natural resources and infrastructure spending. The link between natural resources and infrastructure spending is what we refer to as the ‘China factor’, in that a key investment theme has been to own what China needs.
China’s – and India’s – focus on Africa reflects the immense need for natural resources and security of supply. As local consumption in China grows its need for resources will undoubtedly grow and so will its trade with Africa.
Africa is full of incredible statistics when it comes to demographics, but by 2050, one in three young people will live in Africa, making it the largest youth population in the world. While this can be a double-edged sword, bringing challenges for governments in terms of providing healthcare, education and business infrastructure, it also creates interesting investment opportunities as young workers look to spend their earnings. Young populations provide a ready supply of labour but also demand for pro-growth economic policies from governments and therefore support for solid consumption growth.
There is no denying Africa’s wealth of natural resources. They are diverse and span the continent – gold in South Africa, oil and silver in Nigeria, phosphates in Morocco, flowers and coffee in Kenya and diamonds in Botswana to mention a few. Investors can play the theme across the continent and also re-allocate resources according to the different exposures that appear attractive.
Finally, Africa is a major laggard in infrastructure development, with the lowest regional electricity consumption per capita and paved road density approximately one eighth of the BRIC countries.
Power is the main issue. Most companies we invest in have developed their own power sources, usually, cheaper sources like gas. Though there are not many direct infrastructure investment opportunities, infrastructure spending should be seen as the catalyst for change.
The World Bank has estimated that if sub-Saharan low income countries had an infrastructure base equivalent to a medium income country like Korea; the average per capita growth would be higher by close to 3% per year.
Africa is a high risk market, with myriad constraints. Government corruption, a lack of corporate transparency, inadequate healthcare, weak regulatory frameworks and poor infrastructure have all prevented many countries in the region from achieving their potential. From an investment perspective, liquidity is also a key consideration.
However, with those risks in mind, we believe Africa presents a compelling investment opportunity for long-term investors and can fit as a ‘specialist strategy’ or satellite investment for long-term investors to sit alongside existing core emerging markets exposure.
Africa offers investors diversification benefits and a demonstrable alpha opportunity because of the various inefficiencies.
Sonal Tanna, manager of the JP Morgan Africa Equity Fund
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