Africa – Final Frontier for International Investors

“Space, the final frontier. These are the voyages of the Starship Enterprise. Its five-year mission — to explore strange new worlds; to seek out new life and new civilisations; to boldly go where no man has gone before.”

Tafara Mtutu:Investment analyst

These are the opening lines to a childhood favorite TV show of mine called Star Trek. The show is set centuries into the future where space travel and exploration are possible and one Captain James T Kirk, together with his trusted Vulcan first mate Spock, defy many odds in their journey across the vast galaxies in the famous ship named the SS Enterprise.

Synonymous to Star Trek’s exploration into deep uncharted territories in space is the international investor’s exploration of Africa as the final uncharted investment destination.

The African continent has popularly earned the term “the final frontier” in investment circles because of the many investment opportunities that lie untapped. From an economics perspective, developed countries are increasingly operating close to their potential GDP levels and any capital investments in these countries yield marginal returns as a result. This has prompted investors to look for greener pastures where they can deploy the same amount of capital but yield higher returns. Enter Africa.

For the better part of the 21st century, Africa as a continent has been growing faster than advanced economies and the world based of gross domestic production (GDP) growth figures.

Chief drivers behind the continent’s growth have been a younger demographic and debt financing despite elevated levels of political and economic instability in many African countries.

Further to this, is the continent’s leverage on existing innovations and technologies? A clear case to illustrate this is the banking sector.

Digital banking development has been driven by developed markets, which have spearheaded the development of the necessary software and technological infrastructure needed to facilitate digital banking operations for over two decades.

According to GlobalData, the first major adoption of digital banking capabilities are attributed to Banque Direct and ING Direct in France, as well as Stanford Federal Credit Union, which became the first financial institution in the US to offer internet banking to all of its customers in 1994.

The acceptance for the new delivery channel took over 20 years of development before it was widely accepted. This was also complemented by the growing pervasiveness of tech in the day-to-day life of the modern economy. Banks in Zimbabwe, on the other hand, actively embarked on a digitisation drive in 2016 that began with FBC Holdings.

The digitisation has already begun paying dividends for local banks in less than five years of implementation, a much shorter time compared to banks that pioneered the technology. The same phenomenon can be observed in the almost-instant benefits accruing from state-of-art technologies being deployed in African markets. Global mining companies, for example, have set their sights on Africa with a strategy to deploy the latest technology on the vast resources on the continent.

The aging population in developed markets, especially in Europe, has also become a new threat to sustained economic growth in advanced economies because it means that there are less people driving economic growth. For example, the IMF forecasts that Japan’s average annual GDP growth could decline by 1% over the next three decades because of the country’s aging population.

On the other hand, Africa’s middle class is on the rise because of very low median age of around 18 years. An interesting fact is that, by 2100, close to half of the world’s kids between the ages of zero and four years will live in Africa.

Africa’s rising middle class has been cited by many as the engine for economic and social development, a “resource” that could prove to be most rewarding to any international investor who is willing to pair this the agile middle class with the necessary capital needed to extract value on the continent.

However, the investment case for Africa is being muddled by political and credit risks. The political climate of many African countries has failed to attract much-needed international capital because of a high perception of political risk. Further, the debt held by some of these African states has begun to become more of a burden than a tool because of incommensurate utilisation.

It is my opinion that perhaps the international community is placing more emphasis on these risks than they are on the possible benefits that they could accrue by investing on the continent over a longer investment horizon.

The daily life in advanced economies is usually associated with the word “fast”. The technological breakthrough in almost all aspects of these economies has also spurred an instant gratification mentality, among its citizens. This fast life, to some extent, fuels investor short-termism.

Short-termism refers to an excessive focus on short-term results at the expense of long-term interests.

Short-term performance pressures on investors can result in an excessive focus on their parts on quarterly earnings, with less attention paid to strategy, fundamentals, and long-term value creation. This phenomenon has likely been instrumental in the international community’s reluctance to invest patient capital on the African continent.

In spite of this, we note that China has been aggressive in Africa, especially in these times that other investors have been shrugging off Africa as an investment destination.

Between 2003 and 2018, China’s foreign direct investments (FDIs) into Africa have surged from US$75 million in 2003 to US$5,4 billion in 2018. Maybe China was really taking notes when Warren Buffet’s uttered one of the most popular quotes, “Be fearful when others are greedy and greedy when others are fearful.”

In conclusion, investors have saturated capital markets in developed economies at a time when Africa’s developing economies remain the least tapped avenue for investors searching for greener pastures. Now is the time to bet on Africa, and China is already ahead of the curve.

Mtutu is an investment analyst with Morgan&Co. He writes in his personal capacity.

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