Global investors are incurring opportunity costs by overlooking new markets, including Africa
Investors who have avoided Emerging Markets (EM) since the EM indices’ inception will have faced significant opportunity costs of up to US$1.5 billion. Those who ignore Frontier Markets and Africa may also face significant opportunity costs. This is according to Tendai Musikavanhu, CEO of Old Mutual Investment Group’s Global Index Trackers boutique, who says that the challenges of investing in Africa are deterring global investors, but that as a result they are overlooking the many growth opportunities that exist across the continent.
Speaking at the annual CFA South Africa Society’s annual Africa Travelling Conference, Musikavanhu told delegates that a changing world means that at 10.5% of global capitalization, Emerging Markets is now a mainstream investment market. “While European Markets ex UK have declined from 22.3% to 17.1% over the last 13 years, Emerging Markets have than doubled their contribution to the MSCI World Index market capitalisation,” he explains. “The fact that MSCI EM grew to $1.5 billion more than EAFE for every $100m invested, since its inception in December 1987, shows that unsubstantiated aversion to new or unfamiliar markets such as Africa, can be costly to investors. The relatively recent emergence of Frontier and African Markets as headline benchmarks is another opportunity for investors to recalibrate their thinking.”
Musikavanhu points out that since the end of the Cold War, Africa has seen a trend of strengthening democracy and a move away from the dictatorships that in the past were supported by the opposite sides of the war. “With liberty came greater prosperity across the continent,” he explained. “In addition, Sub-Saharan Africa’s particularly exciting GDP growth meant that it has emerged as the dominant sub-region.”
He went on to list a number of opportunities which are often overshadowed by the risks that exist in the region. “Firstly, Africa’s fundamentals remain solid, which continues to offer high growth opportunities relative to more advanced economies. These include the fact that it offers the largest growth outside of Asia, its growing middle class is now larger than that of India, 45% of its population is under the age of 15, and China is expanding investments in Africa with an expected increase in infrastructure expenditure and consumption,” says Musikavanhu.
“Africa also has limited liquidity, which lends itself to buy and hold investing, a great fit for indexation, and African markets have a lower correlation to other equity markets.” Valuations reflect the lack of investor attention means that African and Frontier markets are relatively cheap, says Musikavanhu, adding that first mover investors could benefit from a rerating of the region in the long term.
However, investors remain reluctant to invest time and money in Africa until certain key issues are resolved, and Musikavanhu believes that the local financial services industry can play a broader role in mitigating these risks. “Challenges across Africa such as insignificant market cap, political instability, corruption, difficulty doing business and the illiquidity of the market, all continue to dilute interest in investing in the continent and cannot be ignored as factors requiring mitigation when looking at Africa as a potential investment,” he says. “However, the potential for superior returns in the long run means that it is up to industry professionals based in Africa, to team up with regulators and governments and help in the alleviation of these challenges.
“For starters, we need to capitalise more of Africa’s economy as it needs to sustain its current growth trajectory, in order to be attractive to global investors. African countries are often considered too small to be a worthwhile investment by global investors so African governments need to position themselves as regional rather than individual themes – Kenya and the East Africa bloc are exemplary in thinking beyond borders. Continental standards need to be agreed, set and monitored by regional bodies.
“In addition, African policy makers need to increase their focus on democratisation, as well as on anti-corruption measures such as more transparency, demand for an independent judiciary, and the application of global best practice standards. Investment professionals can give advice with respect to the latter.”
Musikavanhu also believes that African investment / financial professionals can play a part in easing the challenges of doing business across the continent through the constructive lobbying Government and regulators. “Regulators should be researching and standardizing business and capital market norms across the continent and effective engagement is required with international investors/business to derive an objective view of each respective country’s weaknesses and opportunities,” he says.
According to Musikavanhu, illiquidity in Africa also remains a major deterrent for global investors as it typically takes about 25 days for a $100m portfolio to exit African stocks. Investors want to be able to exit a market promptly, even if their intention is to be a long-term investor. “African regulators should regionalise stock exchanges or go into partnership with major developed market players where dual listings are encouraged to enhance stock/bond liquidity and reduce investment costs of investing in Africa,” he says, adding that this could create increased investor interest and participation in Africa. “We also believe that the promotion of a domestic retirement and savings culture needs to be a committed long-term goal of Government policy, while effective lobbying strategies are needed to drive the revamping of pension and capital market regulation to continually be in line with global standards.”
