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Africa – growing despite the challenges

Institutional investors would do well to consider the future opportunities that investing in Africa, as an alternative, presents.  However, thanks to the recent spate of bad press and challenges surrounding governance within the region, there are many questions as to whether the “African growth” narrative is still relevant.

The African growth story is far from over. We believe that the secular growth trend is firmly intact. If Africa can deliver on its long-term potential, then investors with appetites for risk and sufficiently long time horizons can make good returns from Sub-Saharan Africa, as it reverts to its longer-term upward trend.

We further believe the markets look ahead and have already priced in the recent bad news.  It further highlights that risk premia in Africa are higher (meaning that investors enjoy greater compensation for the extra risk they take on).


While the growth prospects are evident, Africa has recently experienced some headwinds. The main problem in the short term has been the dramatic fall in commodity prices, particularly oil, and in the medium term, the lack of liquidity and relative immaturity of its financial markets. Added to this, more recently transparency and governance have presented challenges in Sub-Saharan Africa.

So should investors retain their confidence that Africa will master its short-term challenges and look to the long-term prospects that Africa offers?

In fairness to Africa, many of the headwinds are entirely external:

  • Greece aside, Africa’s biggest trading partner, Europe, is struggling. Growth seems elusive and as both a key export market and source of donor aid this is putting pressure on many countries current, trade and investment accounts.
  • A reflating US economy and the prospect of normalised real rates has fuelled emerging market risk aversion. The strong US dollar is also putting extra strain on African currencies, and increasing the interest bill for many sovereigns.
  • There are massive concerns around the Chinese government’s ability to manage its slowing economy. Given its sizable appetite for African commodities, this has placed further pressure on resource prices, and many African exports.

Having said this, some headwinds have been as a result of poor or misguided decision making.

Tailwinds: Sub-Saharan Africa remains one of the fastest growing regions of the world

There is no place like Africa; it is an enormous continent offering massive opportunity, and Sub-Saharan Africa remains the second-fastest growing region in the world, with a substantial amount of organic growth waiting to be unlocked. Its burgeoning middle class, a rapidly growing population, positive macro-economic fundamentals and a healthy ratio of younger to elderly people, all bode well for its future economic growth prospects.

In April 2015, IMF’s African Department confirmed that Sub-Saharan Africa’s economy is set to register another year of solid economic performance with growth expected to expand 4½ percent in 2015. The region will continue being one of the fastest growing in the world—second only to emerging and developing Asia. That said, the economic expansion will be at the lower end of the range experienced in recent years, mainly reflecting the impact of the sharp decline of oil and commodity prices over the last six months.

The good news: a secular growth story

A younger, growing and more affluent population

While it’s true that the continent has been endowed with an amazing wealth of resources, we believe that the real wealth is in its people, their intellectual capital and changing population demographics.

Africa has more people aged under 20 than anywhere in the world and the continent’s population is set to double to two billion by 2050.  Africa is the only remaining region of the world where many countries still have the opportunity to capitalize on this trend.

Developments in Asia and Latin America during the last century suggest there is an economic window to harnessing the power of youth. When fertility rates in these regions declined, the proportion of working-age people relative to dependent children, increased. Coupled with improvements in health, education and foreign investment, this resulted in sharply accelerated growth, referred to as the “demographic dividend”.

Growth of a middle class – a burgeoning trend

Africa has a growing middle class, larger than India’s, and the growth of its consumption and aspiration is a trend we see continuing in Africa. The growth of this middle class helps to strengthen domestic demand and increases the demand for goods and services from the rest of the world into Africa. Rampant urbanisation also reduces the cost of distribution, allowing easier access to products and services. Between 2000 and 2010, the number of people in Africa’s middle class grew by 130 million, and forecasts from the African Development Bank suggest that at least 100 million more may enter by 2020.

Huge organic growth!

Untapped resources and agriculture

Africa boasts considerable precious and base metals wealth and is an important player in the world’s energy markets, with 8% of the world’s natural gas reserves.

Sub-Saharan Africa has vast amounts of arable land, approximately half the total agricultural land available globally. There is still huge scope to increase agricultural yields in Africa. With the right infrastructure and skills to unlock them, Sub-Saharan Africa has more than enough energy and food potential to look after its growing population.

Growth in telecoms and improving infrastructure

Although there has been a relative lack of infrastructure in Sub-Saharan Africa, infrastructure spending is projected to reach US 180 billion by 2025, according to PwC.   Interestingly, the fact that there was little fixed-line infrastructure has allowed Africa to “leap-frog” straight into the cellular age with penetration rates now exceeding 75%. Cisco considers that Africa will be the fastest growing region in terms of mobile data traffic and will grow by around 77% per annum or 17-fold over the 2013 to 2017.

This initial technology and infrastructure jump has spurned two additional progeny; mobile money and mobile broadband connectivity. Most African countries have skipped the laptop and desktop era, and jumped straight into mobility, particularly Kenya, where over 80% of adults in urban areas have used mobile phones to send money.

How to harness Africa’s growth

To capture the growth that Africa presents, one needs the right partners to invest across a range of asset classes, in both on and off-market opportunities. This requires “on-the-ground” presence, the right local partners and an understanding of the nuances of the local businesses.

One then needs the patience and agility to invest in these businesses at the right price, the stamina to be occasionally out of sync with the rest of the markets, and the conviction to buy when the time is right.

At Sanlam we continue to grow our established, on-the-ground presence in Africa, bolstered by our recent acquisition of a 30% stake in Morocco-based Saham Finances, and effectively doubling our African footprint.

St.John Bungey CEO of Sanlam’s Africa Investments.

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