By Nile Capital Management
Investing in Africa
2011 has been a challenging year for investors in emerging and frontier markets in general. Certainly, the performance of Africa’s equities has been influenced by global capital flows and overall investor sentiment.
However, we believe the long-term case for Africa’s economic growth remains intact. According to the International Monetary Fund (IMF), Africa will achieve GDP growth of 3.9% in 2011, even with a slowdown in Northern Africa due to political turmoil. GDP growth for all of Africa’s 54 countries is projected at 4.6% for 2012.
1. Consumer growth – Africa currently represents about 15% of global population, and by 2050 the United Nations projects this share will increase to 24%. As education standards and household incomes rise, more Africans will join the middle class and live in cities.
According to researchers at BMCE Capital, Africa has the “fastest urban population growth rate in the world” and its urbanized population will reach 50% by 2030. Should average annual household spending in Africa double as predicted over the next two decades. According to Standard Bank, Africa’s middle class will grow in size from about 60 million households currently to 100million by 2015 (the same as India now).
Already, Africa is home to roughly 1 billion people and has far more total cell phone users (620 million) than the total population of the United States. To put this in perspective, the total number of cell phone users in Africa is more than 600 million today, and was nearly zero in the year 2000.
This demonstrates the potential for rapid consumer adoption and growth. As the developed world continues to deleverage as a consequence of the balance sheet crisis, consumption and economic growth for developed economies will remain weak for years to come. Therefore, the African consumer (or the developing world consumer) will become increasingly important to global growth. In addition, the developing world’s reliance on exporting to the developed world will wane. In fact, over the next few years we expect to witness the opposite, where developed markets are looking to rely more on exports to emerging countries to boost their domestic GDP growth.
2. Natural Resources – By 2015, Africa will produce 78% of global mining output of platinum, 60% of cobalt, 57% of manganese and diamonds, 10% of global copper supply 22% of gold and uranium, and 60% of global diamond output.
Africa’s natural gas output has more than tripled over the past two decades. Combined, Nigeria and Algeria now represent 5.2% of global natural gas proven reserves. Africa already has 10% of the world’s proven crude oil reserves, and by 2030 sources estimate that the continent will attract 30% of global offshore oil capital investment.
Over the past decade, China has emerged as a significant source of Africa’s oil exports, along with Europe and the U.S.
3. As the BRIC countries (Brazil, Russia, India and China) grow into four of the five largest economies over the next 20 years (ranking behind only the U.S.), they will need to import huge amounts of natural resources to support their industrialization and urbanization.
Africa is poised to become an indispensable supplier of natural resources to emerging markets, as well as developed economies. We believe this industrialization and urbanization will underpin the demand for commodities, for example, copper is one of the most used material in consumer products and construction industry.
The Democratic Republic of Congo (DRC) alone boasts 10% of global copper reserves.
4. Infrastructure Spending – Africa has initiated substantial infrastructure development programs to expand electric power generation, highways, ports, mobile telephone grids, and water/sanitation systems. Going forward, infrastructure expansion will continue to act as an economic catalyst while also laying a foundation for future business efficiency and expansion.
For example, public companies in Africa regularly spend about 40% of their total operating budgets on electricity, due to high cost and limited generation capacity across the continent. However, a massive expansion of the Inga Dam hydroelectric complex on the
Congo River is now underway, with joint funding by a regional development authority and South African power company ESKOM. The projected output of this project will increase Africa’s total power generating capacity by more than one-third. A relatively small amount of infrastructure spending in Africa can produce large ripples of economic growth.
For example, the World Bank has estimated that improvements to the continent’s highway systems could decrease transportation costs by 10%, which would result in a 25% increase in intra-continent trade. Apart from these three long-term growth themes, we perceive continued interest among institutional investors in increasing allocations to emerging and frontier markets in general, and Africa specifically.
This interest is being driven mainly by three factors: 1) opportunities to diversify portfolios based on low correlations with developed markets; 2) a belief that economic growth in Europe and the U.S. may remain sluggish as debt deleveraging continues; and 3) developed world investors will continue to demand high yielding assets in high growth emerging or frontier markets.
Read more African Investment Analysis from Nile Capital Management below: