While its political and economic problems are clear, a closer look at Africa can unearth some significant opportunities. Paul Clark, African equities specialist at Ashburton, explains.
Many investors looking at Africa from a high level consider the risks – both political and economic – too large for comfort and too difficult to understand. As such, it is often termed the “dark continent”.
However, the past decade has shown that African economies (there are 54 different countries) are starting to emerge from their post-colonial hiatus.
Apart from South Africa (which is a rather developed emerging market), the continent could largely be termed early-stage emerging, albeit that each country is at a different level of political and economic maturity.
De-risking the ‘dark continent’
As these economies change and trends develop, it results in significant growth rates of expenditure in a particular economic segment or for a particular type of good.
This fact is borne out in the IMF forecasts for GDP growth that predict seven out of the ten fastest growing economies over the next five years will be from Africa.
Companies that are able to capitalise on these trends by being correctly positioned, or adjusting their strategy to benefit from them, can potentially experience considerable growth in demand for their goods or services.
This would allow them to grow revenue, benefit from economies of scale and, with operational gearing, result in significant earnings growth.
However, investing in African companies outside of South Africa is a travel and research intensive process.
Third party research, although improving significantly, is still limited and a considerable amount of analysis is required to identify investment opportunities and, more importantly, to determine the fair value at which a share should be priced.
These businesses have generally operated in environments that are not particularly business friendly. As such, the management teams are adept at overcoming political, economic and operational challenges in uncertain environments.
The companies are, therefore, not as susceptible to adverse conditions as one might initially assume and this limits a downside risk of investing in these markets.
African equity investors need to understand the particular political and economic risks in the country or region where the company operates.
These form a backdrop to understanding the operating environment for each company and inform the investor’s view on the company specific risks that need to be taken into account when building a portfolio of stocks.
Understanding the nature of the opportunities that arise in early-stage emerging economies should entice investors to this space. However, Africa itself is making considerable investments too.
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