Although ‘Africa risk’ has increased because of falling commodity prices, investors should look through this short-to-medium-term macro turbulence and position themselves for a rebound.
Over the past five years, it has become popular to say that ‘Africa is rising’. This great optimism has attracted global investors, placing Africa on the international podium as a new investment frontier with tremendous long-term opportunities. The continent recorded strong real GDP growth averaging 5% over the past decade. Today, Africa’s aggregate GDP is estimated at USD 2.4 trillion, which is exponentially higher than the USD 600 billion at the beginning of the new millennium. Africa is empowered by strong demographics with a young population of about 1.2 billion people.
However, the near-term growth outlook (4% in 2015-2016E) is lower than historical growth levels of 5%, primarily reflecting the adverse effects of falling commodity prices. The impact of this macro shock is heterogeneous across African economies, depending on their degree of GDP diversification and reliance on natural resources. This is not the first time the continent has been confronted with commodity shocks and history reflects Africa’s resilience to absorb severe shocks.
We believe there are seven long-term trends that will support African stock markets:
First, although we expect a slowdown in GDP growth to around 4% over 2015-2016, it should rebound afterwards to historical growth levels of 5-6%. Although oil producing countries are exposed to significant shocks in the short term, they have a unique opportunity to go through painful macroeconomic and fiscal reforms that are necessary for a sustainable, inclusive and diversified long-term growth trajectory. Growth in South Africa will remain low while North Africa appears to have a positive medium-term growth outlook.
Second, investments flows into Africa were robust over the past decade. Although investments in natural resources are likely to be lower as commodities prices collapsed, we expect Africa to remain a growing destination for foreign direct investments in the long term. Top-ranked sectors are consumer, financials and telecoms sectors, and there is a growing investment trend in industrials, power and energy, transports, real estate and healthcare.
Third, the African consumer has emerged over the past decade but purchasing power remains significantly behind emerging market peers in countries such as China and Brazil. The most important catalyst lagging is job creation. Africa must tackle its infrastructure deficit to stimulate private sector investments in labor-intensive industries. This will enable the continent to leverage its untapped demographic dividend to become part of the global value chain, thus boosting job creation and eventually purchasing power.
‘Infrastructure investments will allow Africa to leverage its untapped demographic dividend’
Fourth, infrastructure is the future: we have seen substantial private-public investments in telecommunication infrastructure over the past decade, but this is now shifting to energy, power and transport. There is an unprecedented pipeline for infrastructure investments, but execution will remain crucial.
Fifth, the pension fund industry is still very much undeveloped with the exception of South Africa. However, pension fund and insurance assets continue to grow significantly across the continent and this should gradually boost the liquidity of African equities and provide a tailwind for stock prices in the medium to long term.
Sixth: due to the current illiquidity of many African capital markets, we have seen massive capital flowing into African private equity (PE). PE funds have raised USD 25 billion to invest in the continent from 2007 to H1’2015. As PE funds seek exits in the medium to long term, we expect this to lead to a significant number of IPOs and therefore increase the investible universe of African equities.
Seventh, valuation has become attractive since the sharp correction across emerging markets including African equities. Entry points in Nigeria and Kenya are particularly compelling.