Ebola, terrorism and political upheaval – headlines from Africa over the past year seem a far cry from the inspiring “Africa Rising” story.
But many newly found investors are sticking with the plot.
Even against the additional headwinds of falling commodity prices and the prospect of higher US interest rates, funds active in sub-Saharan Africa insist they still see a compelling growth story, driven by an uptick in regional trade, growing investment and a bulging middle class – the basis of the “Africa Rising” thesis.
“The most consistent growth that we see across the globe seems to be coming from Africa,” said Boston-based Asha Mehta, who manages Acadian Asset Management’s $380 million (R4 billion) global equity frontier fund.
“And it’s likely to play out over the next five to 10 years.”
Emerging markets at large have had a torrid couple of years, fearful of a cresting of China’s economic boom and higher US interest rates.
The more esoteric frontier markets typically weathered this storm, however, as they drew in a different sort of investor – one more atuned to diversification, tolerant of higher risk and locked into long-term themes.
But even for Africa optimists, the news has been trying.
Security threats posed by the Boko Haram and al-Shabaab militant groups, political upheaval in Burkina Faso or the devastating Ebola outbreak that has killed thousands in West Africa, reminded investors of the risks that have led many to steer clear of the continent for decades.
China’s slowdown also jars African economies, whose fortunes have been tied heavily to minerals and oil exploration and which have soaked up swathes of direct Chinese investment.
But investors like Jonathan Stichbury, the chief executive of PineBridge East Africa, say growth in sub-Saharan Africa is much less reliant on commodity prices and much more driven by developments on the ground.
“These countries are enjoying a period of growth which I think is almost unstoppable,” he said, citing factors like falling trade barriers, the elimination of currency controls in many countries and the emergence of a middle class.
For instance, the number of middle-class households in 11 of sub-Saharan Africa’s top economies, rose by 230 percent in the past 14 years to 15 million, according to a Standard Bank report.
That number is expected to swell to 40 million by 2030.
Sub-Saharan African growth should top 5 percent this year, the International Monetary Fund says, rising to 5.8 percent in 2015.
Nigeria, Africa’s biggest economy, should grow 7.3 percent next year, while Kenya is in line for a 6.2 percent boost.
Compare that with global growth forecasts of 3.9 percent.
Oil pain for some
Only a quarter of African countries actually produce oil, data from the African Development Bank (AfDB) shows.
Some of the continent’s poorest countries such as Liberia and Sierra Leone spend 15 percent of their income on oil imports, the AfDB says.
For them, oil’s 25 percent fall this year will be a boon.
Yet exporters like Nigeria and Angola will be hard hit. If US oil futures slip towards $70 a barrel – around $6 lower than current levels – and stay there a while, Angola and Gabon would face a three-notch ratings downgrade, while Nigeria risks being downgraded 1.1 notches, BNP Paribas calculates.
Fund flows paint a mixed picture.
Recent months have seen a slowdown in equity investment flows, with funds dedicated to sub-Saharan Africa but excluding South Africa clocking outflows of $77m this year, adding to last year’s $23m losses, according to EPFR Global.
MSCI’s emerging and frontier Africa ex-South Africa index has gained 1.2 percent this year, almost on a par with global shares.
But Nigerian equities have slumped, with the all share index down 20 percent this year as falling oil prices have dampened investors’ appetite for stocks in the oil exporter.
Mehta said after adding to her sub-Saharan equity holdings over the past year, she was not planning to increase her exposure.
“African markets, as compelling as they are, do just have significantly less liquidity than other frontier countries.”
The main share index in Africa’s largest economy, Nigeria, has a market cap of $70b compared with the $749bn in India’s main index or $476bn in Russia. – Reuters