IABFM Expert Opinion

The Remarkable Rise of Africa: The Final Investment Frontier

By Naaim Abbasi

Thursday, May 21, 2009 00:08:37 AM

With all of the focus on collapsing stock markets and governments around the world bailing out the global financial system, you'd think that investing in a far-off and remote part of the world like Africa would be the last thing on investors' minds. Yet that does not seem to be the case -- at least judging by the near record attendance at this month's London Junto on "The Remarkable Rise of Africa: The Final Investment Frontier."

Sub-Saharan Africa, a region that excludes the Middle East and Northern Africa, consists of 48 countries and boasts a population of 800 million. That's almost triple the population of the United States' 300 million but substantially less than India (population 1.1 billion) or China (1.3 billion). South Africa, by far the most developed economy in the region, dominates Sub-Saharan Africa economically, accounting for more than one-third of the region's GDP.

Sub-Saharan Africa has a tarnished reputation as the world's economic underachiever. Comparisons with Asia are particularly irksome. The World Bank estimates that real income per head in the 48 countries of sub-Saharan Africa rose by only 25% between 1960 and 2005. In contrast, real incomes in East Asia rose a whopping 34 times faster. In the 1950s, high-technology South Korea was as poor as Ghana. Today, South Korea is thirty times wealthier than its former African peer; it boasts the world's ninth-largest economy; and Korean companies such as Samsung are now among the world's leading high technology brands.

Yet over the past decade or so, it looks like Africa is finally getting its economic act together. Just prior to the global financial meltdown, the IMF estimated GDP growth in the region would hit 6.6% this year. That means that if you take India and China out of the equation, sub-Saharan Africa actually is growing faster than Asia. With the notable exception of Zimbabwe, inflation in Africa is largely under control. Mobile phone penetration is soaring and boosting economic growth rates. Banking systems, which were too unsophisticated to have exposure to the subprime market, are rapidly expanding services to serve the emerging middle class. Foreign investment and loans to the region also are exploding, and have risen almost fivefold since 2000 to $53 billion last year. Long a region known for its "frontier markets," sub-Saharan Africa has seen the IMF graduate a select group of countries -- Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia -- to the rank of "emerging markets."

[b]Stock Markets[/b]

Early African investment pioneers such as Jim Rogers argue that growing investor interest in Africa -- a continent where he has invested for more than 20 years -- is a sign that he should sell. That's probably an exaggeration. Although the number of funds focusing on sub-Saharan Africa has exploded in the past few years, investment in the region has hardly gone mainstream. But African markets aren't nearly as tiny as you'd think. With a market capitalization of well over $100 billion, Africa's markets are substantially larger than Central Europe and Russia were in the mid 1990s when they opened up to foreign investors. More importantly, African markets have been on a strong bull run. Between 1995 and 2005, African stocks showed compound annual growth of 22%. As London Junto panelist Francis Beddington of Insparo Asset Management pointed out, a further sign of Africa's maturing capital markets is that the length of the terms of some countries' government debt offerings has grown from six months to five years -- or even longer.

[b]The New Russia[/b]

No doubt, Africa has a long way to go. Skeptics in the Junto audience asked why you would risk any of your money in Africa when established western companies have now become such bargains. Here's why. The best investment opportunities lie where perception differs from reality. Much like Russia and Central Europe in the early 1990s, Africa fits that bill perfectly. It's generally hated. It's undervalued. It's difficult to invest there. But consider that in 1996, the entire market capitalization of Russia and Central and Eastern Europe was less than $30 billion -- at the time, it was less than the market capitalization of Microsoft. Twelve years later, Russia alone had turned into a well over a $1 trillion market and Russians were buying up the most expensive properties in London. As Hermitage Capital founder and Russia's largest investor Bill Browder observed: "Russia is sh*t. But as long as it gets a little less sh*tty, I make a lot of money." You don't need to be a starry-eyed optimist to realize the same logic may apply to Africa.

Global Crisis ‘Vastly Worse’ Than 1930s

By Michael Preiss

Sunday, May 10, 2009 22:35:49 PM

Global Crisis ‘Vastly Worse’ Than 1930s, Tale Says

Key thought / opinion:

Wall Street analysts expecting the U.S. economy to re-bound in the third and fourth quarter were / are: “too optimistic.”


If that really is the case we might be still in a bear market rally, a very powerful one indeed, that however could turn, "just" when you do NOT expect it:

NOT the genuine beginning of bull market.


May 7 (Bloomberg) -- The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.


“This is the most difficult period of humanity that we’re going through today because governments have no control,” Taleb, 49, told a conference in Singapore today. “Navigating the world is much harder than in the 1930s.”

The International Monetary Fund last month slashed its world economic growth forecasts and said the global recession will be deeper than previously predicted as financial markets take longer to stabilize. Nouriel Roubini, 51, the New York University professor who predicted the crisis, told Bloomberg News yesterday that analysts expecting the U.S. economy to rebound in the third and fourth quarter were “too optimistic.”

“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” Roubini said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”

Federal Reserve Chairman Ben S. Bernanke told lawmakers May 5 that the central bank expects U.S. economic activity “to bottom out, then to turn up later this year.” Another shock to the financial system would undercut that forecast, he added.

‘Big Deflation’

The global economy is facing “big deflation,” though the risks of inflation are also increasing as governments print more money, Taleb told the conference organized by Bank of America- Merrill Lynch. Gold and copper may “rally massively” as a result, he added.

Taleb, a professor of risk engineering at New York University and adviser to Santa Monica, California-based Universa Investments LP, said the current global slump is the worst since the Great Depression that followed Wall Street’s 1929 crash.

The Great Depression saw an increase in global trade barriers and was only overcome after President Franklin D. Roosevelt’s New Deal policies helped revive the U.S. economy.

The world’s largest economy may need additional fiscal stimulus to emerge from its current recession, Kenneth Rogoff, former chief economist at the International Monetary Fund, told Bloomberg News yesterday.

“We’re going to get to the point where recovery is just not soaring and they’re going to do the same again,” he said. “We’re going to have a very slow recovery from here.”

Fiscal Stimulus

The U.S. economy plunged at a 6.1 percent annual pace in the first quarter, making this the worst recession in at least half a century. President Barack Obama signed a $787 billion stimulus plan into law in February that included increases in spending on infrastructure projects and a reduction in taxes.

Gold, copper and other assets “that China will like” are the best investment bets as currencies including the dollar and euro face pressures, Taleb said. The IMF expects the global economy to shrink 1.3 percent this year.

Gold, which jumped to a record $1,032.70 an ounce March 17, 2008, is up 3.6 percent this year. Copper for three-month delivery on the London Metal Exchange has surged 55 percent this year on speculation demand will rebound as the global economy recovers from its worst recession since World War II.

Commodity prices are also gaining amid signs that China’s 4 trillion yuan ($585 billion) stimulus package is beginning to work in Asia’s second-largest economy. Quarter-on-quarter growth improved significantly in the first three months of 2009, the Chinese central bank said yesterday, without giving figures.

Credit Derivatives

China will avoid a recession this year, though it will not be able to pull Asia out of its economic slump as the region still depends on U.S. demand, New York University’s Roubini said.

Equity investments are preferable to debt, a contributor to the current financial crisis, Taleb said. Deflation in an equity bubble will have smaller repercussions for the global financial system, he added.

“Debt pressurizes the system and it has to be replaced with equity,” he said. “Bonds appear stable but have a lot of hidden risks. Equity is volatile, but what you see is what you get.”

Currency and credit derivatives will cause additional losses for companies that hold more than $500 trillion of the securities worldwide, Templeton Asset Management Ltd.’s Mark Mobius told the same Singapore conference today.

“There are going to be more and more losses on the part of companies that have credit derivatives, those who have currency derivatives,” Mobius, who helps oversee $20 billion in emerging-market assets at Templeton, said at the conference. “This is something we’re going to have to watch very, very carefully.”

Taleb is best known for his book “The Black Swan: The Impact of the Highly Improbable.” The book, named after rare and unforeseen events known as “black swans,” was published in 2007, just before the collapse of the subprime market roiled global financial institutions.

To contact the reporters on this story: Chen Shiyin in Singapore at [email protected]; Liza Lin in Singapore at [email protected].

Last Updated: May 7, 2009 05:35 EDT