The Final Frontier - Where long-term, risk-oriented investors can profit
When one of the world’s most recognizable names in financial services says that Africa presents “the final frontier” for investors looking toward emerging markets; that the continent’s bountiful natural and human resources present a host of opportunities; and that the continent may be poised to enter an unprecedented stage of economic development, those who pooh-pooh the idea of investing in Africa sit up and listen. The ones who act will be a special breed.
A Merrill Lynch report titled “Africa: The Final Frontier,” identifies 10 sectors offering “major” investment opportunities for the next decade: oil, commodities, agriculture, land and water, healthcare, infrastructure, telecommunications, information technology, defense, financial services and retail. In making its case for investing in Africa, the firm’s investment strategists cite the following:
Under-followed markets. African companies and stock markets remain woefully under-followed.
Increased investment flows and debt relief. The World Bank estimates that net inflows of foreign direct investment into Africa jumped to almost $40 billion in 2006 from less than $10 billion in 2000. Debt relief and forgiveness have also increased, lowering the debt burden for many countries.
Economic growth. Africa’s economy is expanding at rates that exceed global growth and is expected to do so for the next few years. Since 2001, its annual economic growth has averaged 5.0 percent, while overall world growth rose only 4.2 percent.
Economic growth. Africa’s economy is expanding at rates that exceed global growth and is expected to do so for the next few years. Since 2001, its annual economic growth has averaged 5.0 percent, while overall world growth rose only 4.2 percent.
Population growth and demographics. Africa is expected to house the largest youth (under 15) population in the world, providing nations with young workers who, Merrill Lynch says, “will want to earn, learn, and burn (their earnings).”
Economic, legal and political reform. The World Bank’s 2007 report on business reform worldwide, says doing business in Africa has become easier because reformers simplified business regulations, strengthened property rights, eased tax burdens, increased access to credit and reduced the cost of exporting and importing.
Agriculture, land and water. With its abundant land, Africa could become a major food exporter, especially to countries like China that are struggling to feed their people and should become major food importers in the next decade.
China. Given its abundant natural resources, Africa will be a key complement to China’s growth needs. In mid-May China pledged $20 billion to Africa to help provide the capital necessary to build roads and other infrastructure.
Emerging consumer class. Rising per capita incomes should allow for the development of a consumer class in select African nations in the next decade. In 2006, according to the World Wealth Report for 2007 prepared by Merrill Lynch and the Capgemini Group, Africa in 2006 posted the fastest gains in the number of high net-worth individuals, with an increase of 12.5 per-cent from the previous year.
Commodity price boom. Global demand for commodities, and thus the global commodity price boom, is expected to remain firmly in place.
Productivity miracle. The Internet and the much improved productivity of the digital era helped bring about a productivity miracle in many countries. As Africa continues to expand its information technology and telecom usage, a similar period is to be expected.
While investment opportunities abound, many of the constraints that have stymied Africa’s growth potential remain in place, ML’s investment strategists say. These include war and violence; political issues, such as government corruption and standards for the rule of law; underdeveloped legal and financial systems; explosive population growth that could overwhelm the poorest nations; low education standards; poor healthcare systems; China’s potential to become politically and militarily involved in Africa, setting the stage for conflict, and the potential of its low-cost exports to Africa to stifle local industry; malnutrition and obesity; inadequate physical infrastructure; and poor distribution of income. Some countries already are taking steps to address these constraints, notably corruption, rule of law,
physical infrastructure, education and healthcare.
Like all frontiers, Africa harbors enormous potential and enormous risk. Best suited for this landscape, Merrill Lynch says, are longer-term, risk-oriented investors.
By Rosalind McLymont
