Africa is often labeled the “final investment frontier”. It consists of countries whose indicators of social, economic and financial development are relatively low, which translates into more upside potential than anywhere else on the planet.
But these same factors that substantiate this potential are also often viewed as challenges that make investing in the region an unjustifiably risky proposition for many.
This glass half-empty, half-full perception of the opportunities hinges on whether one believes the region can realize its significant potential. In our new white paper, Africa – Cradle of Diversity, we find that the answer to this question isn’t straightforward.
To start, the continent, home to more than one billion people, is heterogeneous. The dissimilarities among its countries are significant, and their paths to development vary greatly, depending on their resource endowment and sociopolitical heritage. Oil-exporter Nigeria, for example, has a very different economy than Kenya, which relies more on tourism to generate foreign exchange.
For many of the continent’s small, open economies, especially those dependent on agriculture and natural resources, the fate of the world economy plays an important role in their development. But, ultimately, how each country confronts domestic and external challenges is in the hands of its leaders, entrepreneurs and consumers. The track record of many of these nations on growth and development is uneven but, on the whole, encouraging.
Indeed, Africa has numerous drivers that could sustain an average annual growth rate of 4 percent, based on IMF estimates. It has the world’s youngest and fastest-growing population and middle class – a major catalyst for sectors such as manufacturing, retail and finance. While primary commodities will likely remain a major source of revenue in several countries, their role in driving growth is diminishing.
But the region continues to face many challenges stemming from insufficient governance standards and reforms. Governments need to ensure the right policies are in place to harness the demographic dividend, ease infrastructure constraints, diversify export sectors and improve intra-regional trade.
For financial markets, Africa can be an attractive destination for investors willing and able to identify the opportunities offered by its favorable demographics and rising urbanization. For now, investability is best in credit, where many liquid instruments exist. For equities, South Africa remains the most important market, but investors can also look at indirect ways to build exposure. Currencies and local bond markets are niche areas but can present interesting opportunities for risk-tolerant investors.
As many African countries will continue to grow at a faster pace than developed nations, so will the size and liquidity of their capital markets gain in relevance over time. But no matter which asset investors pick, risks tend to be higher than elsewhere, and exposure should be held in a diversified manner only.
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