Thanks to its impressive GDP growth, Africa has been dubbed “an investment frontier” and in the past years, it has become an attractive destination for investors with an interest in emerging markets.
Once inaccessible to investors, Africa is now opening its gates to a young, tech-savvy demographic. At the same time, the New York State Common Retirement Fund and several multinationals in the US show an interest in the assets in the region. Lower inflation, the first democratic elections, rich natural resources and a high demographic, all of these are valid reasons why investing in Africa can be a great idea.
However, the region is not without its challenges. Geographically, politically, and economically, Africa is different from other emerging markets, which means that investors should first understand the risks associated with Africa and learn how to mitigate these risks through a well-thought-of strategy.
Investments in Africa vary depending on the country
One very common mistake that beginner investors make is treating African countries as a whole block and applying the same strategy for all its markets. However, the African continent is made of many countries and just as many markets, each with its own particularities, risks, and opportunities. Understanding the difference between these markets is key in developing a strategic approach.
- South Africa is often seen as a gateway to investments in Africa due to its developed economy. Similar to the Middle East in terms of oil assets, South Africa can be a great option for investors who are familiar with the Middle East. The country is also the largest gold and platinum producer in the world, but the agriculture and banking are also developing at a rapid pace.
- Kenya is currently going through a period of political stability. Rural economy is booming, there are many ongoing infrastructure projects, and the country has been attracting many foreign investors.
- Countries in Northern Africa (Egypt, Libya, Morocco, Tunisia) stand out through their crude oil reserves. For example, 10% of crude oil imports to Europe come from Libya alone. However, political unrest often poses risks for investors.
According to the Overseas Private Investment Corporation (OPIC) and UNCTAD, Africa offers the highest returns on foreign direct investments in the world. Despite the global decline in FDIs, Africa gained US$46 billion in foreign investments, 11% more than the previous year.
Some of the key benefits that make Africa a lucrative investment market include:
- An abundance of natural resources – natural capital accounts for most capital wealth in African countries. From oil and gold to diamonds and uranium, the African continent is extremely rich in natural resources, which makes it a prime investment opportunity. At present, only 10% of the African land is being cultivated, but in the future this sector is expected to develop.
- Large population – Because there are so many people living in Africa, there is a constant need for consumer goods and a considerable spending power for cheap goods, so investing in this these asset types is relatively low-risk. According to Deloitte, Africa’s top 50 consumer goods companies generated over $30 billion in 2015. The food subsector performed the best, accounting for 64% of the revenue, followed by the beverages subsector.
- Economic potential – Most African territories are undeveloped and have low income but, as a whole, the region’s economy is growing. According to the World Bank, the biggest economic growth in 2018 was reported in non-resource-intensive economies such as Kenya, Rwanda, Uganda, and Côte d’Ivoire. The sectors with the highest prospected growth in the next three decades are food and beverages, education and transportation, housing, consumer goods, hospitality and recreation, healthcare, financial services and telecommunications.
Although Africa has been associated with poverty for many years, the World Economic Forum estimated that almost half of Africans will be middle or upper class in the next 10 years, so the demand for consumer goods and services will increase considerably – up to a whopping $2.5 trillion, in fact. In 2015, household consumption was just $1.1 trillion.
Government stability is also something that will improve. After long periods of political unrest, small African countries are emerging with new democratic policies, infrastructure projects, and friendlier foreign policies. These positive changes attract investors and boost economic growth in the region.
Risks to watch out for
Trading and investing will always come with a certain degree of risk, and, in the case of Africa, most of the risks stem from the fact that it’s a developing market characterized by political uncertainty:
- Lack of investment policies – Africa is made up of more countries and not all of the countries’ governments have created investor-friendly policies. Investors therefore have to check if the political and legal environment allows them to execute their strategy.
- Poor infrastructure – Although improvements are being made at a rapid pace, several African countries still lack the proper infrastructure to do business. For example, because most of Africa’s natural resources are located in low-density areas, these resources remain unexploited.
- Political regime changes – Business and investments rely heavily on the pollical landscape and, since political conflicts and civil wars are common on the continent, this can trigger a lot of uncertainty for businesses.
Mutual funds or direct access?
Stock & forex trading are becoming valid investment opportunities in Africa and, overall, experts characterize the region as high-risk, high-reward. However, in order for investors to succeed, it’s important to enter the market at the right time, using the right tools. For example, beginners can start by exploring the lowest risk options of mutual funds or ETFs. Then, after they have gained enough experience, they can access African stocks directly by opening a local brokerage account. Most African countries have brokerage firms created specifically for the needs of foreign investors, such as Faida Investment Bank in Kenya and Zenith Securities in Nigeria.