Investing in Africa: How to avoid the western blues

13th October 2011

It is grim news for employment levels in the UK but it is a very different story in frontier markets in Africa as the recruitment section in today's Financial Times suggests. The headline is one we are unlikely to see in the UK for a while – "Jobs galore at the new frontier".

The newspaper notes that PwC has plans to recruit 8,000 staff across Africa, that there is boom in many sectors not just commodities, but financial services, telecoms and media, construction, power and utilities.

The Wall Street Journal reports an African Development report on the growing middle class.

It suggests that as many as 355 million Africans are earning between $4 and $20 a day – the bank's definition of middle class, but that this could reach 1.1bn or 42 per cent of the population by 2060. The FT report even suggests that some posts – say for example sale directors for global firms usually recruited locally – can be commanding western style salaries, though they may be the exception rather than the rule.

And as with almost everything about frontier markets, other assessments are more downbeat. The Journal reports that the Organization for Economic Cooperation and Development estimates there were 32 million middle-class consumers in Africa last year, or just 2% of the population. It defined those consumers as people who spent between $10 and $100 a day. The World Bank makes yet another projection of 43 million middle class Africans by 2030.

Even, the more optimistic ADB warns that there may be too much reliance on resources, there are still huge political risks and a lot of agriculture is organised on too small a basis to make the transition to commercial farming.

Other challenges include the low levels of education and a lack of school and college infrastructure to improve this situation.

However the ADB sees good prospects for what is calls ‘South to South' trade development. It suggests that 27% of African exports will go to the U.S. and the European Union in 2060, compared with more than half today while China alone will receive 25% of African exports, up from around 5% today.

Others are similarly bullish. Modern Finance Report predicts a surge in African/Asian trade to as much as £1.5bn, numbers that have been interesting many western firms such as Deutsche Post and AP Moeller Maersk.

 

But what about an investment approach to help you avoid the economic blues in the West?

Seeking Alpha has two useful articles on investing in frontier markets by Joseph Hogue from consultancy Efficient Alpha.  The first, though written for a US audience, suggests that anyone investing in frontier markets should do so across a range of countries while for emerging markets you may seek out specific countries, though it should only be a small part of a portfolio.

The second article considers how much of a hedging effect, frontier and emerging markets provide against poor performance closer to home.

In it, Hogue considers which countries are likely to be most dependent on exporting to the West and which emerging markets have strong domestic demand and suggests aiming for the latter. As a result one strategy might be to short export dependent China and go long on Brazil which has more internal consumer demand.

But the Frontier Markets blog has a warning – taking the case of Chile as an example of a market that has not performed well or moved beyond the ranks of middle countries in terms of development. In fact, it has been stuck in the middle for decades.

"Now may be the perfect time to finally take a more discerning eye towards EMs instead of lumping them all-together, given that our premise remains that the strong fiscal balance sheets and still largely dormant, demographic dividends upon which much of their stories rest can all-too-easily be undone by an uncouth central bank (not to mention shoddy governance)," it writes.

The Wall Street Journal's Market Watch Matthew Lynn is in more bullish form. He writes: "The emergence of Africa as a rapidly modernizing economy – if it happens – has two significant implications for the global economy.  First it has the potential to blow away much of the gloom around the global markets.

"Next, it is the last real emerging markets story – the final frontier. Most of Asia, Russia, Eastern Europe and South America are now firmly in the middle-income and developed category. Only Africa is clearly underdeveloped – and capable of the explosive growth that emerging markets can achieve."

However back on Frontier Markets the tone is much more sceptical. Considering Africa's potential as a hedge, it notes a recent World Bank report suggesting that there was a definite risk that contagion from a recession in the US and Europe could hit Africa quite badly.

However, the blog sees an investment case as central banks in frontier markets mimic their Western peers and move away from very strict inflation goals to what the blog calls a dovish approach.  

It writes: "Certain economies like Ghana (and other key commodity exporters) could be set to see the best of both worlds, i.e. lingering accommodative policy together with hitherto low inflation.  While not "safe"-havens per se, these are the kinds of economies to key in on when discerning among emerging and frontier economies and while developed growth sputters."

Clearly some experts believe the African growth story can become one to benefit private investors. But by its nature it comes with a high dose of risk. You may consider investing in Africa, just don't bet the house on it. Although, you could always apply for a job.

 

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