Four years ago I attended the launch of a Middle East and North Africa fund. Much was made of the long-term potential of the region’s young population, which seemed to compare so favourably with Europe’s – not to mention Russia’s and large parts of Asia’s. I asked about the risks associated with a preponderance of young men in the event of sluggish growth or job-creation and the portfolio manager politely played them down. Nine months later Mohamed Bouazizi set himself alight in Tunisia.
This tension between long-term potential and short-term risks characterises much of the investment story that is today’s Africa. Taking a look at North Africa after three years of ‘Arab Spring’, we find political risk leaving investors with potentially attractive returns from familiar long-term themes – but also some markets, like Morocco’s, offering similar value with apparently much less risk.
Africa’s abundant human and natural resources constantly bump up against poor infrastructure, under-developed capital markets and weak governance. There have been huge strides in all of these areas, but as is indicated by the recent suspension of Nigeria’s central bank governor Lamido Sanusi for pointing the finger at alleged corruption, even the continent’s leading lights continue to struggle with governance problems.
Often, of course, the short-term risks and constraints are themselves long-term investment opportunities. When we turn to real assets (pages 67-68), we find immense potential for Africa’s uncultivated land not only to feed itself but to respond to the needs of the rest of the world. That potential is constrained by a lack of the infrastructure needed to get food from farm to port to market; but that just makes an even stronger case for investing in the provision of better transport networks – as the local returns of certain kinds of infrastructure assets already suggest.
Much of this required investment will have to take place through private markets. In addition, there is a strong argument that the key emerging-middle-class story is better accessed through private markets than through the continent’s public stock exchanges, which is dominated by banks and brewers rather than a more diverse set of consumer staples and industrial firms. We weigh up the potential for private equity to tap into Africa’s growing disposable wealth against the industry’s propensity to focus on already developed markets like South Africa’s.
On the subject of maturing markets, we turn to the extraordinary explosion of sovereign bond issuance across the region. These issues are the essential foundation for deep financial markets: they provide the baseline from which to price risk in different economies. Given that, it is encouraging to find, in our new age of quantitative easing ‘tapering’, that they are indeed increasingly being priced to reflect local, idiosyncratic risks rather than broad frontier-market or Africa risk. The flipside is that countries that had hitherto carried very little debt are quickly building it up – and becoming inherently riskier places to put money.
The benefits in terms of investment for growth and creating robust financial markets are far too great to discourage bond issuance. Instead, these markets must become less reliant on foreign portfolio flows by attracting more of the savings of their own middle classes. With that in mind, we open our report by looking into how the fast-changing investment rules that govern institutions in some of the most important economies are enabling more pan-African and global allocation. This should not only support the development of capital markets but ultimately help improve governance standards, too.
Martin Steward, investment editor