Should investors head to Africa or Asia in the hunt for returns?

Africa

Alvaro Sobrinho, Chairman, Banco Valor

Beware the consensus view. Who would argue that Asia enjoys the attention of investors seeking burgeoning economies? It is popular, but is it becoming a tired view and obscuring regions with stronger potential?

Sub-Saharan Africa is set to grow at around 6 per cent a year, faster than India. Asia, excluding Japan, is projected to grow at 7 per cent, but these rates are regularly revised down. Fifteen of the world’s 29 fastest growing economies in the world are in Africa. Africa is now where the Brics were a decade ago, signalling huge growth potential. Ten of Africa’s 54 countries have a GDP per capita greater than China, while 17 are greater than India. This means more consumer power, because even though China has a large economy, its people remain poor. African incomes are rising, bringing prosperity to the middle class. Here the talk is not of recession and unemployment but of managing the changes fuelled by economic growth.

Africa is at an earlier stage of its development than Asia. As Asia shows, returns come in the early years. £1000 (€1193) invested in Asia in 1988 was worth £4016 five years later – equivalent to 27 per cent annualised growth. The same sum invested in 2008 is worth just £1517 today – a more pedestrian 7.5 per cent.

Africa’s growth today is investment-led, not sparked by a surge in mineral prices, as happened in the 1970s. Foreign direct investment into Africa increased fivefold since 2000 and 5 per cent in the last year. Growth includes countries like Ethiopia which do not have significant mineral wealth. Rwanda, without natural resources, has been able to sustain a growth rate of 8 per cent thanks to sensible economics. Africa’s resource-rich states are better managing their wealth: Botswana used its diamond wealth to develop quickly, growing from one of Africa’s poorest countries at independence in 1966 to become a democratic, stable, and upper middle-income country.

Africa’s total stockmarket capitalisation grew from $245bn (€180bn) in 2002 to more than $1tn in 2010. According to African economic expert Paul Collier, returns on investment in Africa are higher than in other regions: the average return on capital for companies was two-thirds higher than that of comparable companies in China, India, Indonesia, and Vietnam.

Africa is attracting investment on its merits. The IMF noted sub-Saharan Africa’s growth is helped by ‘prudent macroeconomic management’, debt-reduction programmes in the developed world that have allowed Africa to be growth orientated, and the use of new communications technologies.

Africa has a median age of 20 years compared to 30 in Asia, and the number of working age people will double to 1.1bn by 2040. With rising costs, Asia is no longer the low-wage factory of the world. And entrepreneurial Africans are returning to establish businesses on the continent. Africa has more cities of over 1m population than Europe and has more $20,000+ earners than India. All this is powering consumer facing service sectors, sectors where growth is not correlated with the rest of the world – a tempting combination.

Agriculture is a key sector for growth. Africa has 60 per cent of the world’s uncultivated arable land. Food distribution is improving as transport infrastructure develops and agricultural policies improve. The agriculture sector can diversify into processing. Africa is a big exporter of raw agricultural products.

Africa still has too many barriers to enterprise. A young businessman in Swaziland has to wait 56 days to register his company. A small business in Niger takes a year to find a warehouse. But as these are addressed, growth will pick up. Angola has brought in laws supporting small businesses, creating ‘one-stop-shops’ across Angola to offer advice and support and, crucially, access to credit.

Global investors need to refresh their views of Africa, the perception of the continent lags reality, as it extrapolates past success for other regions. With such an information disconnect, value is on the table for investors.  

James Cheo, HSBC Private Bank

Asia

James Cheo, Investment Strategist Asia, HSBC Private Bank

The question of whether to invest in Asia or Africa is a little simplistic as it ignores the inherent difficulties of investing directly in a market such as the latter. While South Africa has a long established and respected equity market, it is heavily skewed towards mining and materials and doesn’t necessarily provide exposure to the pan-African growth story that is likely to unfold in the years to come. To come up with a more meaningful verdict, let’s take a look at the starting point for both continents and some of the recent history.

The size of Asia ex Japan’s economy more than doubled during the last decade to $20tn (€15tn) helped by near-double digit growth in China. Africa has expanded also, but the output of the more than 50 countries in Africa are equivalent now to just 15 per cent of China’s economy. So what hope for Africa in the next 10 years? Part of Asia’s success during the past decade are its improvements in the rule of law, better functioning financial markets and technology, and an educated and skilled workforce.

While one could argue that the performance of African equities hasn’t fallen too far short compared to Asia – $100 invested in both Asian and African equities in 2003 would be worth around $335 and $282 respectively now – this ignores the lack of liquidity and diversity in African equities one was able to invest in during this period. A better way of investing in Asian equities in recent years has been via stocks listed in developed markets that sell into the region. It is even possible that investing in Asian companies that sell into Africa may become a theme for the next decade.

Africa benefited from the surge in commodity prices over the past decade. Oil rose from less than $20 a barrel in 1999 to more than $145 in 2008. Prices for minerals, grain, and other raw materials also soared on rising global demand. However, unlike Asia which has a diversified economy focused on high-technology manufacturing and services, Africa’s over-reliance on resources exposes it to the fluctuations of global commodity demand. Africa is therefore prone to future setbacks tied to the fate of global commodities especially while its financial markets are in their relative infancy.

Asia’s prospects look bright over the next decade as urbanisation changes its cities on an unprecedented scale. Take China – between 2005 and 2010, the country’s urban population increased by more than 100m. This trend is not going to slow; but rather accelerate just as it did in the US from the 1950s and 1960s. Asia’s urban population will increase by 650m by 2030, led by China, India and Indonesia, and we estimate that to meet their needs, $11.5tn will have to be invested in infrastructure over the next 15 years.

Demographics are big positives for both Asia and Africa, but a key difference is education. Standards in much of Asia are very high and comparable to the West, while education remains a challenge in most of Africa.

Another factor currently giving Asia the edge is the rise of the middle class, but this reflects the differing stages of economic development on the two continents. Asian consumers will be moving up toward the middle income bracket, which means consumer spending will accelerate in coming years, while it may take more than a decade for Africa to reach that stage. But with its richness of resources, young and growing populations and a greater commitment to political and economic reforms, it would be a brave and likely foolhardy choice to ignore the growth potential of Africa in the decade ahead.