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Untapped investment opportunities in Africa
December 8, 2014Article by Kirsty Rose
Bob Geldof criticised pension funds for overlooking Africa, but is now the time to start investing in the continent, and if so what are the risks and rewards.
At this year’s NAPF conference, Bob Geldof criticised pension funds for overlooking Africa despite its fast-growing middle class and young population. The size of the continent is equivalent to India, Europe, the US and China combined.
A slow start for pension schemes
Geldof may well have a point. Trustees are cautious when it comes to new and unusual asset classes. This is to be expected, and indeed is desirable to a certain extent, from those tasked with ensuring scheme members get their pension. However, taking too cautious an approach can mean that trustees miss out on some investment opportunities.
Not so long ago, putting capital into emerging markets was seen as highly risky amongst pension schemes, partly because of the immaturity of the market, and partly because of the high levels of perceived risk amongst trustees. However, they offered high-quality returns and over time were seen as a good investment option for trustees looking to diversify risk. Today, emerging markets are seen as much more accessible, while frontier markets are poorly understood and ill-trusted by trustees.
Is now the time for Africa?
According to the CFA Institute, a global association of investment professionals, Africa’s remarkable economic growth during the past decade was based on sustainable drivers of performance, including a transformation in leadership and abundant natural resources.
Opportunities to profit exist in infrastructure and increasing demand for consumer goods and services from the growing middle class.
A report commissioned by Jersey Finance found that while Africa has fifteen per cent of the world’s population, it generates just four per cent of global output. But the Capital Economics report illustrates that while other continents face ageing populations, Africa’s working age population is expected to double to 1.2 billion over the next 30 years.
Rising consumption amongst this younger population is one of the major drivers of growth. Billions of people are now on the grid, thanks to the explosion of mobile telephones and rising income levels. According to Leapfrog Investments, US$2 trillion was consumed by these households in 2012, a figure which is expected to rise to US$5 trillion by 2022.
The potential investment opportunity for businesses serving these emerging consumers at the “base of the economic pyramid” across all industries is between $400 billion and $1 trillion, according to the J.P. Morgan report on impact investments.
The market can be divided geographically into three zones: North Africa, sub-Saharan Africa (excluding South Africa and Botswana), and South Africa and Botswana.
Tom Elliott, international investment strategist at deVere Group explains, “Botswana is placed with South Africa not because it offers a liquid and diversified stock market – although relative to many countries to its north, it does – but because of the quality of its institutions, which help to reduce risk for investors.”
Ray Withers, chief executive of Property Frontiers, believes there are many good investment opportunities in African property right now.
“Many economies are booming off the back of natural resources; a consumer economy is also developing. Many African countries have young populations and are experiencing a demographic dividend as large numbers of people become economically productive. In such places where social changes are also driving household formation and people are becoming wealthier, there is a growing demand for new homes.”
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