Investors convinced Africa is a continent worth exploring

Historically perceived as a poverty-stricken continent, Africa is fast becoming one of the world’s premier trade and investment destinations, according to Mohammed Al Hashemi, head of asset management at Invest AD, an Abu Dhabi government-owned firm, managing $700m (€530m) for clients in the Middle East and Europe.

The investment house claims that not only do institutional investors see Africa as holding the greatest overall investment potential, but they also plan to increase asset allocation to African markets during the coming five years.

Comprising 54 countries, with more than 21 stock exchanges and over 1bn people, Africa has been largely devoid of investment. But global investors are now intending to take significant stakes in African businesses.

“The investment case for Africa grows more compelling every year,” says Mr Al Hashemi, who previously managed money for the Abu Dhabi Investment Authority in London. “The question is, can Africa achieve an ‘economic miracle’ similar to China and India?”

Macroeconomic changes are raising investor sentiment. In the past 10 years, many long-running wars have ended and multi-party democracy has spread in Africa. The most recent example is Zambia, where citizens peacefully voted out a party that had been ruling for 20 years, and the defeated president stood down.

This, along with lower foreign debts, due to the IMF-World Bank Heavily Indebted Poor Countries scheme, which gave $72bn debt relief to 36 countries, and lower government deficits with a more competitive landscape for privatised companies, has improved the outlook for investment into Africa.

Strong growth is also encouraging investors to look towards Africa at a time of crisis in the eurozone and low returns from the developed world, says Mr Al Hashemi. Between 2001 and 2010, six out of 10 of the fastest growing economies in the world were in Africa. Real GDP growth across sub-Saharan Africa was 6.6 per cent between 2004 and 2008, more than twice that of the 1980s and 1990s. According to the United Nations Conference on Trade and Development, from only $9bn in 2000, foreign direct investment rose to $55bn in 2010.

Changed Market Scenario

Investors are becoming more bullish as a result of the changed market scenario. “There are several improvements. Corporate taxes and trade barriers have been cut and institutional bodies have strengthened in many places. Various debt relief programmes have written off debt in exchange for reforms,” says Mr Al Hashemi.

But despite general optimism, the performance of some countries, such as Zimbabwe, has been dismal. Therefore, specific countries, rather than the whole continent, support the investment story. Investors are most bullish on Nigeria, Kenya and Egypt.

Due to the volatility of returns in Africa’s frontier markets, investors have generally a longer-term investment perspective. “Previously, investors viewed Africa as purely a commodities opportunity,” says Mr Al Hashemi. “But rising consumerism is now rated the most attractive aspect overall of investing in African frontier markets.”

In an Invest AD-Economist Intelligence Unit poll, investors considered an emerging middle class, high economic growth rates, high commodity prices, increasing political stability, favourable demographics and improved fiscal and monetary policies to be the most attractive aspects of investing in Africa. However, investors still expect the highest returns from energy and natural resources, with significant returns also expected in agriculture, construction, financial services and telecommunications.

Barriers and risk

In spite of the positive market sentiment, investing in Africa involves a huge risk. “A good decade has past, but that does not guarantee a good decade ahead,” Mr Al Hashemi says.

The Arab Spring has resulted in some government changes, but governments are unstable. Illiquidity in markets and weak legal and government institutions are biggest risks plaguing investors. Other challenges are bribery and corruption, political risks, weak corporate governance, currency volatility, poor regulation and currency inconvertability.

Additionally, there are several institutional problems. Africa’s capital markets are poorly rated and conducting and executing trades is difficult. African corporates must do more to inform markets of their activities, processes and strategies, according to Invest AD. Moreover, there is no consolidation of markets between countries or national bourses.