INVESTING IN AFRICA
Africa is a stock picker’s paradise, home to companies that can offer a combination of value and the potential for sustained earnings growth. Africa is shifting from one of “deficits” and “gaps” to one about opportunities, prospects, ventures and creativity. That is not news to companies that have paid close attention to the continent and invested here. The fast growing youth population, the urbanization expected to drive over 50% of Africans to cities by 2050, and Africa’s formalizing economy are all well known. These trends and other developments have driven a half century or more of growth in Africa, and will continue to do so.
Why is it a good time to invest in Africa? Africa needs connectors. Missing across much of sub-Saharan Africa are the roads, rails, ports, airports, power grids and its backbone needed to lift African economies. This lack of infrastructure hinders the growth of imports, exports, and regional business. Companies that can connect Africans and markets can prosper. Sub-Saharan Africa is plagued by power outages – almost 700 hours a year on average – sapping productivity, adding cost and leaving businesses captive to back-up and alternative power options. Massive investment is leading to major upgrades and expansion at African ports and airports, but much of Africa’s growth potential depends on in-country and intra-African road, rail and air connections.
A great reason why timing could not be any better than now to invest in Africa is because the customers are changing. With the growth of Africa’s middle class, we are seeing development of new expectations. Educated, urban professionals are young, brand-aware and sophisticated in terms of their consumption. Retailers and consumer brands want to anticipate and drive buying preferences in fashion, home and lifestyle products, but they know they need international standard supply chains if they are to meet demand. The largest economic forces in Africa are small to medium enterprises, working to meet this new demand and competing with global brands.
There is no better timing than now, especially when Africa is at its peek of expansion and diversifying. African economies are finally beginning to diversify beyond commodities, though this is still in the early stages. Africa is seeing a returning diaspora that recognizes the potential and opportunities in their own countries. This population supports local economic growth with their skills and talent, by acting as “first movers”, investing back in their communities. At the same time, African countries are beginning to place bets on non-commodity areas where they can be competitive. And they are packaging themselves to appeal to a broader set of investors. Recognizing they can no longer count on growing investment from China, every country now has what are called “Investment Promotion Agencies”, which act as one-stop shops for investors, assisting with registration, taxes, and other steps to establish companies locally.
This all sounds great, so what are the negatives? First comes liquidity. African markets remain small, and while turnover has increased, they are still small in relation to emerging markets. This means one needs a long investment horizon. These are not markets for short-term traders or tactical allocations but rather a satellite allocation to a long-term policy portfolio. This timescale also allows investors to accommodate the volatility that can at times (such as in 2011) come with frontier market investing. Secondly, liquidity constrains investment size. It is difficult to run significant sums in Africa due to anything above that stretches the opportunity set. Also, macro issues can at times intrude.
Ironically, African domestic markets are pretty unconnected with commodities, despite the cliché that Africa is essentially a play on commodities, and our own approach seeks to be as commodity agnostic as possible. However, a crash in the oil prices would have implications for a country like Nigeria, but be helpful for an importer such as Kenya.
White Storm Capital can help facilitate the entry of these companies into the country so they could invest through mutual agreements and contracts. White Storm Capital can help participating companies feel more at ease and safe knowing that all of their paperwork and logistics will be handled and well taken care of by a Growth Partner Team that will continue to be there throughout their implementation and company growth.
Written By: Juan Edjang | White Storm Capital