A few years ago, the financial press was full of talk about Africa’s investment potential. But the story has gone off the boil amid the downturn in commodity prices and an especially disappointing performance by continental heavyweight South Africa in the past few years. Between 2010 and 2015, Africa’s GDP expanded by an annual average of 3.3%, compared with 5.4% between 2000 and 2010.
However, the GDP statistics tell a “misleadingly negative story”, says a new report by the McKinsey Global Institute. The slowdown stemmed largely from the northern African states, whose performance was dented by the Arab Spring and the slide in the oil exporters’ economies. In the rest of the continent, average GDP growth accelerated slightly in 2010-2015. The “overall outlook remains promising”.
Africa is the region with the fastest rate of urbanisation in the world. Over the next ten years, another 187 million Africans will live in cities – equivalent to ten more Cairos, according to McKinsey. Productivity in cities is always higher than in the countryside, which bodes well for income growth and consumption. Another factor in Africa’s favour is its young population and growing labour force. The latter is expected to number 1.1 billion by 2034. The spread of the internet and smartphones should galvanise growth; electronic payments “are sweeping cross the region and changing the business landscape”.
Still, as David Pilling points out in the Financial Times, there are no guarantees. The “sweet spot” that saw Asia take off consisted of an expanding workforce and fewer children; “stubbornly high fertility” may prevent Africa making this demographic transition. Meanwhile, if basic infrastructure isn’t provided, technology may prove more of “a scrappy fix than a productivity-enhancing miracle”. Yet you get the feeling that “something is going on”. It may be time for global investors to rediscover the Africa story.
And other news…
Debt bubble grows and grows
Companies, countries and agencies have sold just over $5 trillion worth of debt so far this year – a record pace, says FT.com. The next-fastest year was 2007. Borrowing in 2016 could well eclipse the full-year all-time high of $6.6 trillion. The actual total is higher, as these figures exclude government paper sold at auction (such as gilts and Treasuries). Historically low interest rates are driving a desperate search for yield and prompting borrowers to take advantage of it. A total of $11 trillion of government debt now offers a negative interest rate, and Henkel and Sanofi have become the first companies to issue negative-yielding corporate debt – so they are being paid to borrow.
US stocks: out of puff?
Two key drivers of US stockmarket gains are under threat: historically high profit margins and share buybacks. The former have kept profits elevated in recent years despite lacklustre sales growth; as for the latter, “companies (as opposed to individuals and institutions) have been the only consistent net buyer of shares for years”, says Lex in the Financial Times.
The operating profit margin of America’s non-financial companies has slid from 25% to almost 22% in the past two years. And the tailwind from buybacks is easing. They were down by a fifth year-on-year in the first seven months of 2016, as James Saft points out on Reuters.com. Earnings have declined over the past five quarters, so there is less cash in the kitty to scoop up shares. Many companies have borrowed money to buy their own shares, but corporate debt is at record levels, so there seems limited scope for this to continue.
Still, all this doesn’t mean overpriced stocks will suddenly collapse. With interest rates at near-record lows, providing ample liquidity, the most important tailwind of all in recent years is still blowing strongly.