This is one growth market you need to invest in - Africa

published 11 November 2013

13-11-11-nairobi — Africa: the next big thing for smart investors

Africa has often been described as suffering from the commodities curse'.

This is where a country or continent finds itself sitting on a treasure trove of raw materials. All of its efforts (and the efforts of other nations) go on exploiting this raw material.

As a result, other business sectors are neglected, special interests vie for control of the material in question, and the economy ends up being tied to the boom and bust cycle of commodity pricing.

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The good news is, this is changing. And that means Africa could be the next big frontier market to buy for smart investors

What we mean when we talk about Africa

These aren't the Africa' we're talking about.

When the investment industry talks about Africa' as an exciting frontier investment destination, what they're really talking about is sub-Saharan Africa. The bit of Africa that anyone over a certain age associates forever with Live Aid. The famine-torn, horrendously poor, beyond-all-hope bit.

The good news of course, is that this image is rather out of date, and has been for some time. Africa is still poor, corrupt and dangerous but things are getting better.

Sub-Saharan Africa has grown at an average rate of 5.6% a year between 2000 and 2012. Yes, it's starting from a low base, but that's a lot faster than it grew during the 1990s. And it's not just due to population growth. Income per head is rising fast too.

This improvement is also widespread it's not just down to a few out-performers. The fastest-growing nations include Rwanda, Mozambique, Burkina Faso and Ethiopia most of which have had far grimmer headlines associated with them in the past.

According to The Economist, this growth is not commodity-dependent either. Much of it is down to reform, improvements in public finances and inflation, and reduced corruption.

Indeed, there's a very interesting piece in the FT this morning, looking at the growing demand for commodities from within Africa. It starts with a story about one trader who ships tomatoes from California to Nigeria to turn into tomato paste and sell locally.

Another commodity trader, who runs a private-equity-backed trading house in Tanzania, points out that by 2020, "Africa will be majority young and urban, with an expanding middle class, and they will demand energy and food."

This means that from a demand point of view, Africa should have any investor's mouth watering. No region in the world has greater need of better infrastructure. The country also has a young, growing population, which means both cheap labour and huge potential for consumer goods demand.

As Ivan Glasenberg, head of commodities trading giant Glencore Xstrata, puts it in the FT: "Africa's potential is huge."

Powerful industries want Africa to succeed

It often takes longer than anyone thought possible for countries to tackle problems that seem very obvious to outsiders. Look at India's ongoing troubles with infrastructure, for example. And that's with just one government to worry about.

However, while it's easy to get over-optimistic about these big' stories, it would also be very short-sighted to dismiss the very real signs of improvement that have taken place. And it's worth remembering that a lot of people have a lot of money riding on Africa's ongoing development.

Why do you think the commodities trading houses are getting into the African consumer end of the business? They're not charities. This is at least partly about finding a great new growth story to replace the meal ticket that was China.

For example, the International Energy Agency reckons that African demand for oil will rise more rapidly than anywhere else over the next few years. Oil producers need that to be true, because elsewhere in the world, the demand picture doesn't look too healthy.

You should find out how to invest in Africa

Regular MoneyWeek contributor David C Stevenson wrote a piece on frontier markets recently in which he looked at some of the best ways to invest in the continent. (If you're not a subscriber, subscribe to MoneyWeek magazine.)

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.