Investing in Africa, the risks and the potential
Nigerians go to the polls tomorrow to elect their president, the result of which is too close to call. The candidates include incumbent Goodluck Jonathan from the largely Christian south, and former military dictator turned democrat Muhammadu Buharin from the Muslim north. Both are united in calling for peaceful elections and for respect of the democratic process. Hopefully, their supporters will heed the two candidates call and respect the Nigerian people’s decision whatever the outcome. Alas elections in Nigeria have a notorious history of violence, and this election is set against the background of the increased Islamic militant threat of Boko Haram.
While, of course, all people of goodwill would desire a peaceful election and aftermath, it’s unfortunately likely this won’t be the case. However, as investors, we need to be careful about reacting too quickly to emotional triggers. The fact is Africa has its inherent risks for investors. The continent as a whole has a big corruption problem and Nigeria, in particular, has had a poor record in this regard. The fact is though sub-Saharan Africa is now the fastest growing economic region in the world and investors are missing out on a lot of potential if they ignore this growth.
Nigeria itself has expected growth of over 7% in GDP for 2015, while this doesn’t necessarily mean an increase in Nigerian share prices there is a level of correlation. These figures are similar throughout the major sub-Saharan African economies, with Congo, Tanzania, Kenya and Mozambique all expected to see high growth of over 6%. Indeed, the region’s 5th largest economy once associated with poverty and famine, Ethiopia, is expected to have double-digit growth not just in 2015 but over the next few years.
Of course, this doesn’t mean one should just blindly enter African markets. Africa is not for those who are risk averse. It would make sense firstly to find a broker who you trust and is knowledgeable about Africa or at least the African country that particularly interests you. Also, try to pick stocks and areas which have the most potential for growth. Technology is the first thing that comes to mind, with more and more Africans using smartphones, mobile banking and apps built around mobile banking have become hugely popular throughout the continent. In fact, mobile phone companies themselves are worth looking at, as it’s often the mobile phone companies themselves who provide the mobile banking service in these unregulated markets.
Corruption, however, remains as one of Africa’s biggest problems. The least corrupt country in Africa according to Transparency International is Botswana. In fact, Botswana has been Africa’s greatest success story with the highest average growth in GDP in the world since its independence back in 1966. This year it has a more modest growth prediction of around 5% in comparison to some of its neighbors. 5%, however, is still significant growth. Once one takes into account that Botswana is a stable and mature democracy, picking the right portfolio of stocks in this country could be the right choice for those who are interested in Africa but want to keep a handle on the level of risk involved.