Should You Invest in Africa?

ASK THE EXPERT: Africa embodies everything investors look for in an emerging market - offering the chance to profit from rapid economic growth. But what are the risks?

Emma Wall 15 July, 2015 | 10:53AM

This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio. 

 

 
 
 

Emma Wall: Hello and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm here today with Jan Dehn, Head of Research for Ashmore Group.

Hi, Jan.

Jan Dehn: Hi.

Wall: So, we're going to talk about Africa today. You describe Africa as a proper emerging market. What exactly do you mean by that?

Dehn: I think Africa epitomises what you think of as emerging market countries. These are countries that are growing faster than other regions of the world, evolving more rapidly, undergoing structural changes more quickly and associated with that you also have more rapid financial sector development, financial deepening, financial broadening.

Whole country is entering into the global capital market for the first time and literally opening up entire nations to investors. So, that is really what emerging markets are all about and you get that in a very concentrated fashion in Africa.

Wall: So, Africa is definitely growing faster than other regions in the world, I think 4.5% compared to 2% for developed markets, but it's no good if you can't access that growth. I mean, how easy is it to invest in Africa? How many of these capital markets can we gain access to?

Dehn: Well, there has been a very rapid development here over the last 10 years. There are now 16 countries out of the 63 countries that make up the main fixed income benchmark indices. But of course, there are 54 countries in Africa and a number of them are going to enter into these indices over time. Of course, you also have the option of investing even though it's not an index yet. There are plenty of markets in Africa that haven't been recognised in the indices yet. So, there is really a big benchmark opportunity as well as an off-benchmark opportunity in Africa.

Wall: Before we move on to those opportunities perhaps we can look at the risks because if you just look at the headlines there is a lot of macro, political, civil unrest reasons that perhaps you'd want to avoid the region?

Dehn: Yeah, I think there is certainly a legacy of bad reputation coming out of Africa but it's important to understand that there have been dramatic transformation since the end of the Cold War. We now have about 80% of African countries, 80% of 54 countries that are countries with regular elections and democracies.

There has been a massive transformation of the political risks. You still get the odd negative risk event and you need to be an active manager in this space in order to avoid those situations. But in general, the African story is a dramatically improved story compared to where it was during the Cold War period.

Wall: What about those opportunities then? Because I think a lot of professional investors use South Africa as a way to gain access to the wider Africa region through those revenues because South Africa is perhaps the most developed market, the most averse market. You've got companies like Tiger Brands which I think people are familiar with. Is it just about South Africa, is it just about consumer stocks or is it commodities, is it wider?

Dehn: No, it's a much, much broader canvas here. You have access really to the whole of Sub-Saharan Africa. Most of these countries have stock markets, most of them have local bond markets and increasing number are issuing sovereign dollar bonds. You can also go in and buy corporate debt, both in local currency and in hard currency across the African continent. The equity market opportunity is particularly interesting. But again, it's important to be an active manager.

One of the risks that investors have in Africa is that Africa is still very commodity dependent. So, some of the oil producers, some of the copper producers have been taking a hit recently. But then there are other more diversified economies like Ivory Coast, for example, we quite like in fixed income and in equities there are a number of opportunities across the continent, pharmacy opportunities in Egypt, micro finance opportunities in places like Botswana. But you really got to go into the individual countries and pick out these opportunities as you see them.

Wall: In Asia there is a lot more movement towards stopping being the factory of the world and becoming more inward looking about development of growth. Is Africa dependent on – so for example, if U.S. growth halves tomorrow, is that going to hit Africa?

Dehn: Not that much. Africa has gone through a major transformation where it used to depend a lot on foreign aid, public flows from developed economies. But Africa has been very clever in positioning itself in such a way that it is now more dependent on market financing and financing and investment out of China and I don't think that those areas are going to change dramatically for Africa. It's very much a domestic demand-led story.

The improvements in macroeconomic policy has led to greater confidence, more money stays in Africa, gets reinvested in Africa and takes advantage of a consumer-led recovery in Africa really from very low levels. So, it's a very sustained structural growth story that I think is going to be very resilient, much more resilient than people actually expect to developments in the western world.

Wall: Jan, thank you very much.

Dehn: Pleasure. Thanks.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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About Author Emma Wall

Emma Wall  is Web Editor for Morningstar.co.uk.