Africa – Final border for international investors

“Space, the final frontier. These are the journeys of the Starship Enterprise. The mission of five years – to explore strange new worlds; to seek new life and new civilizations; to go with boldness where no one has gone before. “

Tafara Mtutu: Investment Analyst

These are the opening lines for a favorite TV show of mine called Star Trek. The show takes place centuries into the future, where space travel and exploration are possible, and one captain James T Kirk, along with his trusted Vulcan first mate Spock, challenges many on their journey across the major galaxies in the famous ship with the name SS Enterprise.

Synonymous with the exploration of Star Trek to deeply unknown areas in space, the international investor’s exploration of Africa as the last unknown investment destination.

The African continent has earned the term ‘the final frontier’ in general in terms of the many untapped investment opportunities. From an economic perspective, developed countries are increasingly working close to their potential GDP levels and thus capital investments in these countries are yielding marginal returns. This has forced investors to look for greener pastures where they can use the same amount of capital but yield higher returns. Enter Africa.

For most of the 21st century, Africa as a continent has grown faster than advanced economies and the world is based on gross domestic product (GDP) growth figures.

The main drivers behind the growth of the continent were a younger demographic and debt financing despite the increased levels of political and economic instability in many African countries.

Further to this, is the influence of the continent on existing innovations and technologies? A clear case to illustrate this is the banking sector.

Development of digital banking services is driven by developed markets, which have led the development of the necessary software and technological infrastructure needed to facilitate digital banking operations for more than two decades.

According to GlobalData, the first major adoption of digital banking capabilities is attributed to Banque Direct and ING Direct in France, as well as Stanford Federal Credit Union, which became the first financial institution in the US to offer internet banking services to all its customers. 1994.

Acceptance for the new delivery channel developed over 20 years before it was widely accepted. It is also complemented by the growing technology in the daily life of the modern economy. Banks in Zimbabwe, on the other hand, actively launched a digitization campaign in 2016, starting with FBC Holdings.

Digitization has started less than five years of implementation with the payment of dividends to local banks, a much shorter time compared to banks that did the pioneering of technology. The same phenomenon can be seen in the almost immediate benefits due to modern technologies used in African markets. Global mining companies, for example, have set their sights on Africa with a strategy to harness the latest technology on the major resources on the continent.

The aging population in developed markets, especially in Europe, has also become a new threat to sustained economic growth in advanced economies because it means fewer people are driving economic growth. For example, the IMF predicts that Japan’s average annual GDP growth over the next three decades could decline by 1% due to the country’s aging population.

On the other hand, the middle class in Africa is increasing, due to a very low median age of about 18 years. An interesting fact is that by 2100 almost half of the world’s children between the ages of zero and four will live in Africa.

The growing middle class in Africa is referred to by many as the car for economic and social development, a “resource” that can be very rewarding for any international investor willing to link this agile middle class to the necessary capital needed to exploit. value on the continent.

However, the investment case for Africa is confused by political and credit risks. The political climate of many African countries has not attracted the much-needed international capital due to a high perception of political risks. Furthermore, the debt that some of these African states possess has become more troublesome as an instrument due to excessive use.

I think the international community may be placing more emphasis on these risks than on the potential benefits they can bring by investing on a longer investment horizon on the continent.

Daily life in advanced economies is usually associated with the word ‘fast’. The technological breakthrough in almost all aspects of these economies has also spurred an immediate satisfaction mentality among its citizens. This fast-paced life leads to the short term of investors to some extent.

Short-term refers to an excessive focus on short-term results at the expense of long-term interests.

Short-term performance pressure on investors can lead to an excessive focus on their parts on quarterly earnings, with less attention to strategy, fundamentals and long-term value creation. This phenomenon was probably instrumental in the unwillingness of the international community to invest patient capital on the African continent.

Despite this, we note that China was aggressive in Africa, especially in these times that other investors have shaken off Africa as an investment destination.

Between 2003 and 2018, China’s foreign direct investment in Africa rose from US $ 75 million in 2003 to US $ 5.4 billion in 2018. Perhaps China really made notes when Warren Buffet said one of the most popular offers: ‘Be afraid if others are greedy and greedy if others are scared. “

Finally, investors have saturated capital markets in developed economies at a time when Africa’s developing economies are still the least used for investors looking for greener pastures. Now is the time to bet on Africa, and China is already ahead.

Mtutu is an investment analyst at Morgan & Co. He writes in his personal capacity.


Leave a Reply

Your email address will not be published. Required fields are marked *