House View by the Chief Investment Office

Africa - cradle of diversity Exploring a continent of opportunities

On 31 July 2013, former US President Bill Clinton posted in a Tweet that he had "just touched down in Africa". Considering the distance between the continent’s northern-most point, Ras ben Sakka in Tunisia and its southern-most point, Cape Agulhas in South Africa, Clinton’s remark is equivalent to saying he has landed somewhere between London and Beijing. But Africa is not only a lot bigger, it is also more diverse than many think.

As the second-largest and second-most populous continent after Asia, Africa is home to 54 sovereign nations, with a total population of 1.2 billion people who speak around 2,000 different languages and dialects.

With so much diversity, the continent cannot be lumped together. For example, when it comes to corruption indices such as the World Bank's Worldwide Governance Indicators (WGI), the very bottom of the ranking includes countries such as Somalia, Libya, Angola and the Democratic Republic of Congo. But on the other hand, the Seychelles, Botswana and Namibia rank in the top quartile globally in their control of corruption, distinctly higher than countries such as Spain, Korea and Italy.

"The Seychelles, Botswana and Namibia rank in the top quartile globally in their control of corruption, distinctly higher than countries such as Spain, Korea or Italy."

A focus on large, vibrant markets

Because of their size, investability, and potential, we take a closer look at Egypt, Ghana, Côte d’Ivoire, Kenya, Mauritius, Morocco, Nigeria and South Africa.

We see opportunities for rapid growth in Côte d’Ivoire, Egypt, Ghana and Kenya. These economies can all expand at annual rates of 5% or more, we think, although they need to continue doing their homework in the years ahead.

Mauritius and Morocco are more advanced than most other countries discussed here, and their economies are expected to expand at a slower rate. Still, they have opportunities too, for example via growing their manufacturing exports to Europe in the case of Morocco, or further extending their dominance as a financial hub in the case of Mauritius.

Nigeria and South Africa, the two largest economies in our sample, face less benign prospects. While Nigeria simply needs to continue reforming to unleash its full economic potential, South Africa’s situation is more precarious. More market-friendly policies are needed there if the country wants to keep its economic potential from deteriorating further.

How and where to invest in Africa

Favorable demographics, rising urbanization and rapid growth make Africa an attractive investment destination for those willing and able to identify the opportunities these developments present.

Investability is best in credit, where many liquid instruments exist. For equities, South Africa is by far the most important market, but investors can also look at indirect ways to build exposure. Currencies and local bond markets are niches, but can present interesting opportunities for risk-tolerant investors.

Finally, private markets are an important avenue to explore, as they can provide access to some of the most vibrant growth stories in Africa. No matter which asset investors pick, risks tend to be higher than elsewhere, and exposure should be held in a diversified manner only.

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