Granted, the games are providing a welcome break from news of global financial calamity. However, U.S. investors should take note. This summer’s World Cup provides a glimpse at what the Boston Consulting Group has called the “Overlooked Continent.” U.S. investors would be wise to stop and smell the East African coffee beans.
Africa is one of the most under researched and under invested market sectors, despite the continent‘s claim to a wealth of natural resources and strategic mineral reserves. Many US investors are unaware of some of the investment characteristics of Africa:
- Historically, African markets have had a lower correlation[i] with emerging and developed markets.
- Some African markets have had higher historical returns compared to emerging and developed markets with lower volatility. For example, from December 2001 to December 2009, the S&P 500[ii] generated a compounded annual growth rate (“CAGR”) of -0.36 percent with a 15.6 percent standard deviation[iii] versus a 20.01 percent CAGR from a composite of African markets[iv] with a 14.4 percent standard deviation during the same period. Simply stated, adding an Africa allocation to the S&P 500 portfolio may potentially increased return while reducing portfolio risk. This would be a benefit to investors!
- In the first quarter of 2010, the top three African markets returned anywhere between 20-26 percent, with Nigeria returning 24. 7 percent.
The investment team at Nile Capital Management believes that the long term performance of African markets is strong. Over the past 10 years, South Africa, which represents approximately 80 percent of the current African market capitalization, returned 12.7 percent CAGR relative to 7.3 percent CAGR for the MSCI Emerging Markets Index during the same time period[v]. The data indicates that investing in Africa has the potential to deepen or actively weight investors’ Emerging Market allocation. Adding exposure to Africa has the potential to increase return while reducing overall portfolio risk.
The economic growth for many African countries has averaged 10+ percent annually over the past 10 years according to the IMF. The World Bank estimates that, (i) many African countries are projected to grow by more than 6 percent over the next five years, and (ii) 12 of the 25 fastest growing economies are located in Africa.
Several investment catalysts are driving economic and capital markets growth in Africa. A broad core theme is Africa’s young demographic with strong trends towards urbanization. This is generating demand and growth of infrastructure (steel, cement, construction, telecom, energy, media, etc.), financial services, and consumer goods. Africa has also experienced a trend towards greater political stability and transparency. Currently, more than 70 percent of African nations are now governed under functioning democracies versus 12 percent in the 1980s. In fact, according to the World Bank, several key African countries rank very competitively with BRIC (Brazil, Russia, India and China) nations in terms of ease of doing business.
Another catalyst of the long-term economic development and growth of Africa is the continent’s vast reserves of natural resources. The overall global demand trend for commodities has led to a permanent shift to higher commodity prices. This has driven increased investment in the development of natural resources in Africa. As an example, China recently announced a $23 billion investment to build three oil refineries in Nigeria. African economies are deriving substantial benefits in economic and income growth from these types of investments.
So while the rest of the world is transfixed by a bunch of guys in shorts kicking a white ball, I am happy to focus on the hidden economic jewels within Africa: strong growth potential, rich in natural resources and hard assets, and historically a low correlation of return to the US and other developed markets.
I read a quote the other day in a Financial Times report on Africa that seems very appropriate; “An eminent businessman once commented that profit lies where the gap between perception and reality is greatest.” My eyes are on Africa.
Robert G. Roach is the COO/CFO of Nile Capital Management, LLC., an investment manager that manages funds focused on Africa including a recently launched Pan Africa mutual fund (www.nilefunds.com). Mr. Roach has more than 25 years of investment and investment banking experience. Mr. Roach may be contacted at email@example.com.
[i] Correlation is statistical measure of interdependence between two or more random variables. Correlation can vary from +1 to -1. Values close to +1 indicate a high-degree of positive correlation, and values close to -1 indicate a high degree of negative correlation. Values close to zero indicate poor correlation of either kind, and 0 indicates no correlation at all.
[ii] The S&P 500 Index is an unmanaged composite of 500 large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. You cannot invest directly in an index.
[iii] Standard deviation is a statistical measure of the variability (volatility) of a security derived from the security’s historical returns, and used in determining the range of possible future returns. The higher the standard deviation, the greater the potential for volatility.
[iv] Composite includes South Africa, Nigeria, Kenya, Mauritius, Ghana, Egypt, Morocco, and Botswana
[v] The MSCI Emerging Markets Index is a capitalization weighted index of stocks in emerging markets from the America, Europe, Middle East & Africa, and Asia