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Africa has a promising future

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

The region has made encouraging progress in recent years – but it is still an extremely risky investment.

Click to toggle accordion What you’ll learn:

Why investing in frontier markets is not for the faint-hearted.

How African economies are showing signs of improvement.

Which technological developments are helping bolster growth.

Money from around the world has been pouring into Africa for years, attracted by its vast array of raw materials. As huge emerging markets such as China and India have developed and modernised, demand for commodities has soared, spurring further investment in the continent.

But beyond the clamour for raw materials, the long-term potential of the continent is attracting wider attention.

Africa has a young and rapidly expanding workforce, along with increasingly diversified economies. A growing number of countries in Africa have improved their political and economic governance in the past few years, providing a more stable environment for businesses to grow.

Africa could therefore prove a promising long-term investment – albeit an extremely risky one. Most countries in Africa are considered ‘frontier markets’. In investment terms, this usually describes developing economies with small, volatile stock markets. Your risk of losing money is greater even than in emerging markets, such as Brazil, India or China.

Investing in frontier markets should be undertaken only by those with high-risk appetites. Even then, it should comprise only a small proportion of a diversified portfolio.

A rich source of commodities

One of Africa’s main attractions to investors has been its plentiful supply of raw materials. Africa is the source of a tenth of the world’s oil and a third of its cobalt, which is used in alloys for aircraft engine parts, and is also a key component of lithium ion batteries – crucial for consumer electronics. The continent accounts for 70% of the planet’s tantalum, a mineral used in laptops and mobile phones, and most of its platinum, useful for catalytic converters as well as jewellery.1 Half the world’s diamonds come from Africa.2

No wonder, then, that the total value of Chinese investment into Africa increased by a factor of 20 to around $32 billion between 2005 and 2014.3 While some plans have failed to come to fruition, there have been many examples of Chinese money and expertise being used to build new African infrastructure. These projects have helped the movement and export of goods, promoting overall development.

In October 2016, for instance, a new 750km train route constructed by Chinese companies opened in Ethiopia, Africa’s fastest-growing economy where GDP expanded by over 10% last year.4 The line connects the Ethiopian capital Addis Ababa to the port of Djibouti, bypassing a potholed road and reducing the journey time from three days to around 10 hours.

The economy’s improving backdrop

In the meantime, countries in Africa have also been getting their own house in order. The political backdrop has greatly improved, with the number of armed conflicts on the continent almost halving between 1993 and 2014.5

South Africa, Angola, Liberia and Sierra Leone are key examples of states that became classified as peaceful in this period. Coups have also become far less frequent – there have only been four so far this decade, compared to 20 in each decade between 1960 and 2000.6

The spread of democracy is also encouraging. Between 1960 and 1991, Mauritius was the only country in sub-Saharan Africa to experience a peaceful change of government. Today, few governments in the region are dictatorships, although elections are hardly always free and fair.

While corruption remains endemic, regular polls covering more than 30 sub-Saharan African states suggest that people think matters have got better in the past eight years.

Rwanda stands out in this regard. Only 7% of a sample of the population surveyed thought that corruption was widespread in the government. The watchdog Transparency International found that it has whittled corruption down to ‘negligible’ levels in recent years.7

General economic governance has moved in a market-liberal, business-friendly direction. Nationalisation and inflationary money printing were once common, but now governments have made progress in tackling red tape, keeping a lid on public spending, and reining in inflation. Five of the 10 fastest reformers in last year’s World Bank report on the ease of doing business are African – Uganda, Kenya, Mauritania, Senegal and Benin.8

More stable government has led to measurable improvements in health and wealth levels. The proportion of Africans living in absolute poverty is still 41%, but this has declined from 58% since 2000. Primary school enrolment has jumped by a third in the same timeframe and malaria deaths are down by 60%.9

Malawi has managed to bolster its life expectancy at birth from 44.1 years in 2000 to 62.7 years in 2014, while Zambia, Zimbabwe, Rwanda and Sierra Leone have also recorded impressive increases in this period.10 Botswana, meanwhile, is widely recognised for its success in combating HIV and AIDS.11

Promising fundamentals could boost growth

The improving political backdrop could make it easier for the continent to benefit from its positive fundamentals – the youth and size of the population, and the workforce.

At a time when the developed world is ageing rapidly, Africa, whose overall population is currently 1.2 billion, is on track to have 1.1 billion people of working age by 2034. That’s more than India or China, according to a study by the consultancy McKinsey Global Institute.12

Education across Africa has also improved. Literacy rates among young people in sub-Saharan Africa are typically around 70%.13

An expanding labour force bodes well for growth, as does a rapid rate of urbanisation. In the next 10 years, a further 187 million Africans will live in cities. This figure is the equivalent of 10 cities the size of Cairo, the continent’s biggest metropolis.14

Productivity is higher in cities, where industries and innovation tend to cluster, than in rural agrarian economies. Better productivity boosts income and the demand for goods and services, reinforcing growth.

As the population grows and becomes richer, household consumption could expand at a healthy 3.8% a year over the next decade, estimates McKinsey. In the past five years, it grew at a similar pace, the second-fastest behind emerging Asia.15

Multinational companies are increasingly eyeing up the continent, helping to change where and how people shop. Until recently, most Africans concentrated on small, informal markets. Now global supermarkets are entering the fray. French supermarket giant Carrefour has just opened its first branch in Kenya.16

Will technology fuel a rapid catch-up?

The rapid spread of technology throughout Africa has also fuelled hope that Africa can quickly catch up with the developed world. For instance, the spread of mobile phone networks has led to exponential growth in phone ownership and given communication a huge boost.

The landline network is sparse, but the advent of mobiles has effectively allowed Africa to skip this stage of communication network development. In South Africa and Ghana, 89% and 83% of adults respectively own a mobile, up from 33% and 8% in 2002.17

Similarly, the spread of smartphones is helping bolster growth and productivity. Almost one in five adults own one, a figure expected to hit 50% by 2020.18 One promising area is mobile payments, where Kenya’s M-Pesa is a pioneer.19 People can transfer money to each other without needing a bank account, which has helped thousands of small businesses flourish.

Meanwhile, the spread of internet-enabled devices is fuelling a rise in e-commerce, with revenue doubling in Nigeria every year since 2010.20

How Barclays can help

It’s crucial for investors to keep in mind that for all the improvements in recent years, Africa remains rife with political and economic risk. There’s no guarantee, for instance, that improvements in governance will continue.

Governments may fail to deliver the investment in education and infrastructure required for Africa to exploit advantages like a young, working-age population. If the economy slows enough to ensure that the pace of job growth no longer absorbs the expansion of the workforce, it could lead to instability, hindering development.

Remember that most African stock markets are in a category known as ‘frontier markets’, an even riskier proposition than emerging markets. Only South Africa and Egypt are classed as emerging markets by index provider MSCI.21

Kenya, Mauritius, Nigeria and Tunisia fall into the frontier category, as do stocks drawn from states in the West African Economic and Monetary Union (WAEMU) – Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal and Togo.

Investors should bear in mind that for all Africa’s long-term potential, frontier markets can be extremely risky. The effect of problems that often rattle emerging markets, notably political upheaval, poor corporate governance, or major companies going bust, will tend to be magnified in small, illiquid markets. They can plunge as worried investors rush for the exit.

As we’ve mentioned previously, this is only for investors with strong stomachs, and even for them, it should only make up a very small proportion of their overall portfolio.

One way to gain exposure to Africa is through a fund that has a global approach, with small holdings in frontier markets around the world. The largest African holdings in the portfolio of the Templeton Frontier Market fund (LU0768359852) are Kenya, Nigeria and Egypt, which collectively comprise around 15% of the assets.

Please bear in mind that our referring to these investments doesn’t constitute advice or a personal recommendation to invest in these or any other investment.

Also, remember that investments can fall as well as rise and you may get back less than you invested. We don’t provide investment advice. If you’re unsure whether an investment is right for you, you should seek independent advice.