REPORTS of people cancelling safari holidays in Kenya and South Africa due to fears of Ebola (over 3,000 miles away in Guinea, Liberia and Sierra Leone) are the latest manifestation of the devastating impact on African economies wrought by the perception of Africa as one homogenous place.
Nowhere else in the world would 54 countries, home to over 1bn people speaking over 2,000 languages, be lumped together in the way that Africa has been. The media’s tendency to use a broad brush to paint an intricate and complex picture has meant that many investors have missed some extraordinary opportunities over the past 10 years, so it’s worth taking a closer look and disaggregating the continent. In financial markets, the gap between perception and reality is usually where the highest profits lie.
Change in Africa has been evolutionary, not revolutionary, so many of the most significant shifts may not have been noticed or fully appreciated. With populations increasingly aware of their rights and empowered to demand accountability, governments are under pressure to devolve the fruits of growth to citizens. This will in turn provide the foundations for further growth, as the 300m-strong middle class (on the African Development Bank’s estimate) grows by 5 per cent annually and disposable income (and the tax base) widens.
With legal jurisprudence in most countries based on English or French law, property rights and the rule of law are stronger in many African countries than in most of Asia. But to know this, you have to be on the ground, drawing on local insights and knowledge and looking beyond headlines and rhetoric. While the risk is lower than often reported, the returns are actually higher. On our calculations, between 2000 and 2013, equity markets in sub-Saharan Africa have generated cumulative returns of 249 per cent, compared to 13 per cent in G7 countries.
The expansion of the private sector across many countries in Africa has bolstered the region’s resilience to external shocks and fostered the emergence of more dynamic and nimble economies. Remittances are a major driver of the continent’s growth. Estimated at $32bn in sub-Saharan Africa in 2013, they exceed aid inflows. The brain drain of the 1980s and 1990s now looks like a great win for the continent, as serious money flows in and is deployed more efficiently than aid, going directly to communities and local businesses. Capital is not the only thing flowing: 70 per cent of African diaspora MBAs state a desire to return home after graduation, and many experienced professionals with 20 to 30 years of international exposure are now returning to Africa to take up key positions.
Some countries in particular are leaping ahead. The 2005 banking sector consolidation in Nigeria was not only a signal of increasingly decisive leadership, but with no recourse to the public exchequer, it has ultimately produced one of the best capitalised, well-regulated and liquid financial sectors in emerging markets. The ongoing power privatisation process is already paving the way for massive investment in generation and distribution capacity, which should spur wider investments in industrial sectors, as the cost of doing business falls significantly. Even with poor power supply, Dangote Cement runs profit margins (about 50 per cent) which Lafarge and Holcim can only dream of, and it’s a business model built not on exports but on domestic demand.
Nigeria’s new-found status as Africa’s biggest economy also seems to be driving a mindset shift in politics, as Nigeria’s politicians start to act as leaders. The government moved swiftly to contain the recent Ebola outbreak in Lagos, limiting new cases and offering up to 200 Nigerian healthcare professionals to combat the virus in Sierra Leone, Guinea and Liberia. However, it’s not plain sailing. With a young and aspirational population of 170m people all seeking decent jobs, the upcoming 2015 Presidential elections, and the security threat posed by Boko Haram, Nigeria has some serious challenges to overcome. But ultimately, it’s simply too big to ignore. If you’re looking at African public and private equity investing and you don’t have a strategy for Nigeria, you’re wasting your time.
Let’s be honest. Progress is messy and the way it plays out is not always linear or predictable. Savvy investors will take a long view on African opportunities and seek to gain local insights to inform their decisions. Events such as next week’s Global African Investment Summit in London, bringing together international capital and African project developers, are critical in facilitating transactions and building a more nuanced understanding of risk and opportunity on the ground. The more people engage actively with the continent, embracing the contradictions, the unpredictability and the incredible thirst for innovation, the better they will be placed to identify outsize returns.