Investing in African markets can yield high returns for a dozen reasons, said Larry Seruma, CEO and managing principal of Nile Capital Management. Africa's economic growth is experiencing a powerful upward curve that will continue for the next several decades, making it a "ground floor opportunity" for investors. In the last decade the African Composite Index consisting of eight countries returned an annualized 13.83%.
The low correlation potential in Africa is rich because only a few of its stock markets or public companies are included in popular emerging markets indexes or index funds. The portfolio exposures of large institution and hedge funds to the continent remain relatively low. This means Africa hasn't experienced liquidity driven inflows and outflows of capital like other emerging markets. African markets aren't driven by the tides of systematic global market risk.
Africa's strong economic and market growth can be attributed to countries enacting macro economic reforms such as credit regulation, labor market regulation, business regulation, liberalized markets and free trade policies, Seruma explained. The country is also urbanizing at a faster rate. Its GDP increase per capita came from a growing workforce, which is projected to increase from 500 million to 1.1 billion.
Numerous African countries are generating strong cash flows, earnings and profits. Stock markets and public companies represent approximately $1 trillion in market capitalization. Of 53 African countries, 23 have active stock markets with a total of 1,500 companies listed. More than 100 of these companies have revenues greater than $1 billion. Africa's larger well known international brands include South African Breweries, Anglo Platinum and Old Mutual. These three companies collectively have about $47 billion in sales.
An increased global demand for commodities, especially energy and strategic and industrial metals has caused countries to turn to Africa for its natural resources as these countries industrialize. The growing global population will create a larger demand for food. The continents suitable arable land could meet this through demands by cultivating the land, resulting in a need for new technologies and investments.
The political risks associated with causing financial instability in Africa have been exaggerated. More than 90% of African nations have functioning democracies compared to 12% 25 years ago. Additionally, China is playing a major role in Africa's economic advancement. China increased its trade in Africa from $19 billion to $90 billion in a nine-year period.
With China's investment, Africa is undergoing massive infrastructure development. China's investment has also forced African governments to improve property rights and reduce political risk. The African governments are negotiating better agreements with foreign investors or corporations that require investors to develop domestics industries.
Another investment appeal is Africa's low debt-to-GDP ratios compared to Japan, U.S. and Europe, which gives African nations more flexibility to repay sovereign debts unlike many mature economies. Since investors are taking an interest in Africa, increase in capital flows remains strong. The value of the leading companies remains high and these companies enjoy attractive pricing and profit. Finally, African citizens aspirations for a better life will continue to create urbanization, infrastructure development and consumer markets growth, which leave vast opportunities for growth, according to the report.
Read Ben Warwick's column on emerging markets from the archives of InvestmentAdvisor.com.