Given all that’s going on in the world right now, you might feel like playing it safe.
Greece lingers like a bad smell. Chinese stocks have crashed. There are hints of interest rate rises from both the US and UK.
So you could be forgiven for feeling a bit worried about emerging markets, let along the even riskier ‘frontier’ markets.
However, one part of the world is still quietly getting on with the task of growing – and even low commodity prices can’t stop it.
This morning I’d like to take a look at Africa.
Africa might be poor, but it’s far from hopeless
Even today, for most people Africa is primarily associated with war, extreme poverty or disasters like the Ebola crisis. And it’s undeniably true that living standards remain very low compared to the rest of the world.
However, the region has made huge strides in recent years. Growth has averaged around 5% a year over the last decade. This means that GDP doubles every 12 years. Other measures have improved greatly too.
Conflict has decreased, while new drugs have helped to bring the Aids epidemic under control. As a result, African life expectancy has risen rapidly from 50 years in 2000, to nearly 60 now. In the case of Botswana, it has shot up by 17 years in over a decade.
Combined with a high birth rate, this declining death rate means that Africa’s population is expected to double in size over the next 35 years. While Europe and Asia struggle to deal with ageing, Africa will have the highest proportion of young people in the world.
It’s not just demographics that give it an advantage. Africa is steadily making progress in building up its institutions and infrastructure. Despite the ongoing struggle with the terrorist group Boko Haram, Nigeria successfully held an election in March, with the defeated incumbent peacefully leaving office. That’s something that would have seemed nigh-on impossible a decade or so ago.
Of course, Africa’s other big problem has been the ‘commodities curse’. Its vast resources of raw materials have proved to be more of a hindrance than a help. There are plenty of reasons for this, but the main one is that mineral wealth encourages leaders to get rich quick by plundering the country while spending fortunes on building up armies.
The dominance of mining and raw materials also crowded out investment in other sectors. So money that should go on improving infrastructure and finding a business model that take a nation higher up the value chain than simply digging stuff out of the ground and sending it elsewhere, was squandered on constant civil war and border skirmishing.
On top of this, during the 1970s and 1980s, many African countries used the commodity boom to rack up huge debts, which they struggled to repay as prices crashed.
How Africa is escaping the ‘commodities curse’
So naturally, you might assume that the current slide in commodity prices is bad news for Africa. Yet the decline of mining and energy has been matched by a surge in services, construction and manufacturing – suggesting that the ‘curse’ is starting to lift.
One sign that Africa is moving out from under the shadow of minerals and energy dominance is the performance of Nigeria. Despite the price of oil falling by around 40%, it managed to grow by 6.3% in 2014. While growth is expected to slip to 4.5% this year, it should increase to 5.5% in 2016 and 5.8% in 2017.
As a result of this growth, there has been a rapid rise in the number of ‘middle class’ Africans. One estimate puts the number as high as one-third of the population.
Of course, the definition of middle class is very different to what you or I think of as middle class. The definitions span from someone earning $2 to $20 a day – not what we would regard as middle income. But even if you use a more realistic definition – someone who consumes more than $15 a day – the overall trend is upward.
A study last year by Standard Bank found that the number of people who were middle-income by global standards in 11 key countries had more than tripled from 4.6 million households to around 15 million within the last decade. They further predicted that this would rise by another 25 million in 15 years.
So what’s the best way to invest? African stock markets are still in their infancy. The lack of liquidity and high risk means that funds tend to stick to the relatively developed regions, such as South Africa and Egypt, which aren’t the most dynamic parts of the continent. As a result, the best way to gain direct exposure to Africa is to buy into a company listed on either the London or New York Stock Exchanges.
I’ll be taking a look at some of the best ways to invest in Africa in the next issue of MoneyWeek magazine, out next Friday.
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