Investors should rise with the dawn of the African century
Africa has a troubled history and recent years have been difficult. But conditions are ripe for a turnaround in the continent's fortunes – investors should get in early, says Matthew Partridge
It has been a tough few years for Africa. The fall in commodity prices over the past 15 years, as well as the Covid shock, caused growth rates to slow in most African countries, as Benoît Chervalier, an investment banker and co-founder of the Business and Industry in Africa Chair at ESSEC Business School, points out. But the future for the continent looks brighter. African GDP is “still growing faster than the rest of the world” and African countries are starting to emerge on the world stage. South Africa is a member of the G20, and regional bodies such as the African Union are “being taken increasingly seriously”, says Paul Jackson, global head of asset allocation research at Invesco. We are merely at the start of what Jackson calls “the African century”.
Should investors turn bullish on Africa?
The main reason for being bullish on Africa is demographics, says Jackson. One of the big causes of the strong global growth seen in the decades after 1950 was the demographic explosion that took place after World War II. But right now most of the world is on a “slippery slope” downwards, with birth rates at, or well below, replacement rates. In Africa, by contrast, while birth rates have slowed a bit, they are still high enough to ensure that the population grows by roughly 1.5% a year.
As well as expanding, Africa’s population is also “much younger than that of other parts of the world”, says Jackson. This will be an important tailwind for the continent’s economies. It will be a long time before Africa has to start worrying about ageing populations and having “anguished discussions about the cost of care and pensions systems”, as policymakers in Europe and Asia are doing. And unlike Latin America, where “disastrous” falls in birth rates presage a European-style demographic crisis in a few decades’ time, Africa’s demographics could actually end up improving, at least in the medium term. Longer life expectancies and moderating birth rates could end up reducing the number of very young people relative to the working-age population, decades before the number of elderly people starts to increase significantly.
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Demographers estimate that Africa’s share of the world’s working-age population will nearly triple, from about 15% at present to more than 40% by the end of this century. At the same time, the fact that Africa as a region is starting from a lower level in terms of income per capita gives it an advantage when it comes to labour costs, says Jackson. Such a large pool of cheap labour will help Africa take over from Asia “as the factory of the world”.
Africa's youth at the forefront of change
African countries have long struggled with poor governance and lack of stability, as Martin Jacob, a professor of accounting and control at IESE Business School, points out. And that matters, because without political stability it’s hard to attract investment. If African countries could improve the quality of their institutions, companies from developed countries, such as the UK, Germany, France, Spain and the US, would be much more likely to invest. The good news here is that Africa’s “demographic dividends” are also starting to help address this problem, says Yvette Babb, a portfolio manager at William Blair. Generation Z – those born between the mid-to-late 1990s and the early 2010s – accounts for a large share of the voting-age population in many African countries, making them key players in the political process. This is starting to “drive change across the continent” as younger voters challenge parties and rulers that have been in power for a very long time.
In Kenya, for example, an increasingly influential younger generation is producing “winds of change”. Protesters have pushed the current president, William Ruto, to lower taxes and clamp down on corruption. Ruto himself was elected on the back of strong support from younger voters. Senegal is also being pushed in a pro-reform direction by a younger generation. These are all signs that Africans are starting to demand more from their leaders and hold them to account if those demands are not met.
Expectations about governance in the continent across all demographic groups have improved, says Babb, “especially when it comes to the managing of the public finances”. It is hard to make generalisations that apply to the entire continent, not least because there are several ongoing conflicts and governments continue to come to power by non-democratic means. However, there have been a large number of elections on the continent that have brought about a better focus on improved governance.
External pressures
Domestic pressure isn’t the only thing driving reform in Africa. When the pandemic hit, many African countries were already in a fiscally precarious position. As a result, many of them were either forced to carry out radical economic restructuring or to turn to bodies such as the International Monetary Fund for assistance, which made support conditional on economic reform. Not every country has carried out the reforms, and some of the changes that have taken place are more focused on fiscal policy than structural issues, but economic reform is happening, says Babb, and that is starting to feed into a “post-pandemic revival of African economies”.
There has been a lot of progress on “country-level policy reforms that have begun to address long-standing macroeconomic vulnerabilities and social pressures”, agrees Laura Reardon, a portfolio manager with MFS Investment Management. South Africa and Nigeria in particular have seen “significant policy shifts” that are “yielding tangible improvements in the growth outlook”. With Covid now firmly in the rear-view mirror, debt levels are stabilising and budgetary consolidation is leading to a reduced risk of economic crises caused by sovereign defaults.
Pursuit of freer trade
Some critics are more sceptical about the pace of reform, however. “Research suggests that many African countries still face major challenges in improving their governance, especially following the Covid pandemic,” says Chervalier, even if some African countries have managed to improve their business environment. One major positive sign of meaningful economic reform is the creation of the African Continental Free Trade Area (AfCFTA), which was set up in 2018 and now encompasses most countries in Africa and covers more than 1.3 billion people. The aim is to stimulate trade within Africa by eliminating all tariff and regulatory barriers.
Indeed, the creation of such a free-trade area is “not just something that is nice to have, but a must-have for economic development”, says Chervalier, especially for the smaller African economies that are too small to have a meaningful internal market of their own. The trade bloc should help boost intra-African trade, which is currently dismally low, accounting for roughly 15% of Africa’s overall trade, compared with 60%-70% for trade within Asia and Europe. And by boosting the economies of smaller countries, the free-trade deal should also help resolve a situation where currently just seven economies account for 70% of Africa’s GDP.
Of course, just because Africa’s leaders have agreed in principle to eliminate tariffs doesn’t mean the barriers have actually been removed. But we should see it as “more a gradual process of reducing and eliminating tariffs than a binary process where change happens overnight”, says Chervalier. Daron Acemoglu, a professor of economics at MIT and winner of the 2024 Nobel Prize for economics, also considers the creation of AfCFTA “positive for Africa…especially if it has spillover effects by encouraging countries to carry out wider institutional reforms”.
New technologies and industries
Africa is also showing promise when it comes to technology. The continent is a late developer, which has been bad for its population in terms of living standards. On the other hand, that has made it easier in recent years for African countries to adopt new techniques and industries. It is not stuck with old technologies and hence does not have to bear the costs and hassle of switching – it has even “leapfrogged richer countries in certain areas”, says Jackson.
A case in point is the energy sector. Europe may have “made big strides in terms of the greening of its economy”, but even today only about half its power comes from renewables. The problem is that the European (and North American) energy transition has been slowed by the fact that “they had to go from a situation where it was all coal, to one where oil and gas played a major role, and only then did they start to make strides with renewables”. By contrast, Africa can skip the first two stages and just go straight to renewables. Adam Kendall, head of McKinsey’s sustainability practices in Africa, agrees, noting that Africa has “abundant renewable resources, including wind, hydro and geothermal energy, as well as 60% of the world’s best solar resources”.
A similar process is already underway in financial technology, especially mobile banking. Ownership of mobile phones, and even smartphones, is in many African countries on a par with that of richer countries, says Jackson. In countries such as Singapore, for example, where legacy banking systems were some of the most sophisticated in the world, businesses naturally built their operations around those systems. But African companies and individuals are effectively starting from scratch, says Lily Bi, CEO of the Association to Advance Collegiate Schools of Business. “It has made sense for them to directly embrace fintech from the start.”
This gives Africa an edge as fintech “can be up to 80% cheaper for transactions and offer interest on savings up to three times higher than traditional players, with remittance costs up to six times cheaper”, says Mayowa Kuyoro, head of McKinsey’s financial services practice in Africa. This cost-effectiveness is a “significant advantage in a region where consumer purchasing power is generally low”. And the fintech revolution in Africa is “progressing rapidly, driven by a combination of technological advancements, increasing internet penetration and a young, urbanising population”. Africa is the second fastest-growing fintech region globally, with the number of tech start-ups tripling between 2020 and 2021, reaching roughly 5,200 companies, nearly half of which are financial technology companies.
Investment floods in
All this has led to a “huge increase in the amount of investment flowing into Africa” over the past decade, says Bi. Part of this is accounted for by China and its “belt-and-road initiative”, but the sources of foreign capital are broadening, reducing the continent’s dependence on Beijing – a good thing for those concerned about China’s geopolitical ambitions. Many Europeans are now investing in Africa as well, and a lot of investment has come from the United Arab Emirates, which sees a lot of potential in Africa.
Investors do appear to have become much more willing to consider investing in Africa over the past four years, says Babb, both in terms of direct investment and by buying African assets. There has been a “push” from investors in the Gulf, for example, who see African agriculture as a solution to their problems over the long-term security of food supplies. At the same time, with valuations in many asset classes in developed markets becoming “stretched”, investors are turning to African bonds and shares – the “low valuations, high yields and lowered levels of perceived risk appear favourable”.
Indeed, foreign investment could “make Africa the world’s breadbasket in addition to the world’s factory”, says Jackson, and also “help to get the continent’s economy moving more generally”. Higher levels of foreign direct investment, especially from the private sector, could in turn accelerate improvements in governance. “The more outside involvement that you get, the more that will drive the setting up of the necessary institutions and regulations and laws, as well as a greater uniformity of those rules and regulations across the continent.”
The investments to buy now
The easiest way to invest in Africa is through a broad-based exchange-traded fund (ETF), such as the Xtrackers MSCI Africa Top 50 Swap UCITS ETF (LSE: XMAF). This covers the 50 largest African companies, accounting for 85% of total available shares on the continent. It includes North African companies and many from Sub-Saharan Africa as well, such as the South African technology firm Naspers, as well as the bank First Rand (also from South Africa). The total all-in fee is 0.65%.
Since South Africa is by far Sub-Saharan Africa’s largest and most liquid stockmarket you might want to invest in it directly, through the iShares MSCI South Africa UCITS ETF (LSE: SRSA). This tracks the MSCI South Africa 20/35 index, which focuses on large- and mid-cap shares. The amount that can be put into the largest holding is limited to 35% of the fund. There are 31 holdings, ranging from banks and resource companies to consumer and technology firms. Major holdings include technology conglomerate Naspers, mobile phone company MTN, as well as Standard Bank and resources firm AngloGold Ashanti. The total expense ratio is 0.65%.
Of the South African companies, Naspers (Johannesburg: NPN) looks the most interesting. Originally a magazine company, it now owns a wide range of e-commerce and technology firms, both directly and through a stake in the technology company Prosus, including several payment providers and education technology companies – firms that are set to benefit from Africa’s young, tech-savvy population. Revenue growth has been roughly 20% over the last few years, but the stock still trades at a relatively modest 12 times 2026 earnings.
Another interesting South African technology firm is Altron (Johannesburg: AEL). It provides IT services to a wide range of companies and clients in South Africa, the wider continent and Europe. It has recently gone through a major restructuring to focus on security and financial technology, which should increase both growth and profitability. Altron trades at 14.5 times 2026 earnings and has a dividend yield of 3.5%.
One UK-listed firm that is benefiting from the boom in the African mobile sector is Airtel Africa (LSE: AAF). It is the second-largest telecoms provider in Africa with 140 million users, and the leading firm when it comes to mobile money services. Revenue has grown by 60% between 2019 and 2024 and is expected to keep growing by around 10% a year, with a strong return on capital employed ratio of just under 20%. It trades at a modest 12.5 times 2026 earnings and a yield of 3.3%.
Lesaka Technologies (Nasdaq: LSAK) is a US-listed African fintech and payments provider that focuses on small companies and individual merchants. It aims to address the fact that much of the informal economy is still not properly served by South African banks. The company is not currently turning a profit, which makes it a risky investment, but growth has been impressive, with revenue rising by 250% between 2019 and 2024. It is forecast to keep on expanding at a rapid rate over the next two years.
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