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Why You Should Invest In Africa – And How

Posted on 12. Feb, 2010 by Kamilla in Opportunities

Africa is often referred to as ‘investing’s final frontier’. This is mainly due to the fact that, although many entrepreneurs to date have ventured into Africa and made millions of dollars (and in some cases, billions – Mo Ibrahim, Patrice Motsepe), the vast business opportunities on the continent remain largely untapped.

There are many reasons for this – the main one being perception. In the past, Africa gained a reputation for having nothing to offer the world except poverty and corruption. The reality is that many African countries have taken quiet but big steps towards better governance, real economic growth and a forward-thinking approach to social issues. However, the old ingrained perceptions persist. Have a look at this video to see what I mean:

(Shame the video-clip was cut short by CNBC before he could finish making his point.)

History shows that the best investment opportunities can be found where perception differs from reality, in other words, where things are not as bad as they seem.

This skewed perception results in a situation where mainstream investors stay away, leaving those who are brave enough not to ’follow the crowd’ free to reap the benefits of being ‘the first on the ground’ – namely, snapping up assets cheaply due to the fact that they are undervalued by the ‘perception discount’, building market share in an environment with little competition etc.

The early bird does indeed get the worm! Just ask the local, Chinese, Indian and Western companies that are already making serious money in Africa. (Africa Rising: How 900 Million African Consumers Offer More Than You Think)

So, I have put together below a summary of some (but by no means all) reasons why you should be investing in Africa and some ways you can get about doing so. Hurry, though, because the mainstream investors are starting to catch-on – see video (however, note the cliched, outdated images used – again, skewed perception):

Why Invest?

1. Rapid Economic Growth

Africa has some of the fastest economic growth rates in the world. IMF figures released in January showed that Africa’s economy expanded in 2009, whereas most others contracted.

Furthermore, the IMF raised its growth forecasts for Africa for this year and next, projecting an expansion of 4.3% in 2010 and 5.3% in 2011. Compare this to its growth projections for the United States (2010 = 2.7%, 2011 = 2.4%) and the European Union (2010 = 1.0%, 2011 = 1.9%).

2. Political Stability

Many of Africa’s countries have achieved sustained political stability, which has contributed to their increased economic growth. There are no doubt pockets of trouble, but to brand the entire continent as a turmoil pit is to discount the fact that Africa is made up of over 50 countries, many of which are stable. Again, this is a perception issue.

3. Rising Middle Class

Africa’s middle class is growing and so is their demand for consumer goods, mortgages, education, entertainment etc. This segment is rapidly becoming a gold mine for many local and foreign businesses.

4. Abundant natural resources

Africa has an abundance of natural resources – copper, uranium, gold, platinum, oil etc –which are, and will continue to be, in demand by other fast growing economies, such as China and India. This is one of the drivers behind China’s high level of investment in Africa.

5. Vast business opportunities

As there are so many sectors that have the potential for development, the business opportunities are vast. The telecoms, IT and financial services sectors have already seen a lot of growth, but real opportunities exist in other sectors such as agriculture, infrastructure, renewable energy, manufacturing, chemicals, tourism, pharmaceuticals, horticulture and education to name just a few.

How To Invest?

1. Start a business venture

This is an excellent way to invest in Africa. You might already be running a company and would like to export your products to Africa. Or you might be looking to set-up a business venture in Africa from scratch. As outlined under the ‘Vast Business Opportunities’ section above, the sectors ready for investment are numerous. Furthermore, many countries have put in place measures/incentives to encourage investment.

It is vital to do your research thoroughly, particularly ensuring that you gain contacts ‘on the ground’ in the country you are interested in or link-up with a government organization that has such contacts. For those of you based in the United Kingdom, UK Trade and Investment is an excellent government body with extensive contacts and expertise in Africa and they are willing to ‘hand-hold’ UK companies looking to invest there. There are several other resources that may be helpful and these will be covered in later posts.

2. Real estate

The growing African middle class, the rising number of Africans returning from abroad to settle at home, the growing number of companies being established that require local or expatriate staff, the increasing number of foreigners looking for an exotic new location for their holiday homes….all these factors have led to a great increase in the demand for good quality housing.

Demand in many countries outstrips supply. There are also a large number of commercial development projects that can be invested in. So, real estate clearly offers real opportunities.

3. Stocks

Before the downturn which hit them hard, Africa’s stock markets had offered investors double digit returns. Although the effects of the global crisis can still be felt, many analysts are expecting a robust recovery.

The stock markets offer investors with a long-term view a good way to invest in the continent, providing that the risks of doing so are fully taken into account. In particular, volatility, illiquidity and size are key issues.

How does one invest in Africa’s stock markets? For those who are able to do so, one option is to invest in local stock markets directly. Another option is to invest via mutual funds with holdings in Africa or via exchange traded funds (ETFs). Many African companies issue American depositary receipts (ADRs), which are traded on exchanges in the United States.

There are also so-called ‘investment clubs’, which provide a particularly good route for individual investors to get involved – the most well-known of which is the Ghana Investment Club.

4. Bonds

Yet another way to invest in Africa is via bonds. One route is via bond ETFs, such as Investec’s Zshares GOVI, which tracks the Bond Exchange of South Africa GOVI Index.

Another route is via Diaspora bonds. A diaspora bond is a certificate of debt issued by the government of a developing country to members of its own diaspora community with a promise to repay the investment plus interest at the time of maturity. The raised funds are then used to finance development projects in the country. To date, Ethiopia has issued such bonds, with Liberia, Kenya and Ghana said to follow soon.

5. Micro-finance

For those of you who are also after ‘feel-good returns’, there are ways to support entrepreneurship in Africa via micro-finance. Kiva is a very good choice. Through it, you can basically loan money to low-income entrepreneurs in Africa, providing the working capital they need to develop their businesses. Read more at www.kiva.org/press.

The main point to take away from this article is that Africa should be on your list when considering what investments should go in your portfolio or when investigating a potential new business venture.

Do your research, talk to all the right people, look beyond the headlines to find the pearls of opportunity and take calculated action.

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Tags: Africa, Opportunities, Video