Focus on Africa: Young and poised for growth

Africa’s contribution to the global economy may be small, but it is certainly growing. One of the key drivers of Africa’s growth is its demographics. At present, an estimated 1.1 billion people live in Africa, compared with China’s near 1.4 billion but, due to its population dynamics and faster rate of growth, Africa’s population is expected to outstrip that of China within the next 15 years. 

Africa has the youngest population of any continent, with 45 per cent being below 15 years, while the median age in Sub-Saharan Africa is 18.6 years. This means that there will be more people of working age who are able to contribute to the economy, with fewer older people being a drag on growth. Another key driver of Africa’s growth is its increasing middle class, currently larger than that of India.

Many companies based in South Africa, for example, are selling products and services to the rest of Africa to take advantage of this growth. The continent is also attracting significant foreign direct investment (FDI) flows, from, amongst others, the Chinese, who particularly favour investment in infrastructural projects. This is manifested in plans to build the world’s largest hydropower project, the Inga-3 dam, in the Democratic Republic of Congo.

So how developed are the continent’s stock exchanges? Africa boasts 28, of which the largest is the Johannesburg Stock Exchange, representing 24 per cent of all listed companies. That’s not to say, however, that regional indices are not experiencing phenomenal growth. In Tunisia, la Bourse de Tunis had 18 new listings in 2014, bringing the number to a total of 67, and a staggering 25 per cent increase over last year. Here, it’s also worth mentioning Umeme, Uganda’s National Electricity Distribution Company and Safaricom, Kenya’s leading mobile network operator.

 

Umeme, Uganda

Uganda has the equivalent of just over 1 per cent of the energy supply of South Africa, for a population approximately 70 per cent the size of that of South Africa. As the economy grows, so will the demand for power. Umeme has a very simple and effective business model. It installs pre-paid electricity meters (i.e. you pay for electricity up front) and collects the cash. Its contract with Uganda’s central power utility is in US dollars and it retains a third of what it collects, meaning it has no cash flow issues.

 

Safaricom, Kenya

The lack of existing infrastructure has meant that African companies have been able to use new global technologies to address local business needs. A great example of this is in the telecoms arena as few countries have fixed line networks so cellular technology has taken off. Safaricom is a cellular operator, and 45 per cent owned by Vodafone. It’s mobile money, M-Pesa, is leveraging their cellular network to move funds around the country without cash changing hands. It is a safe, reliable, low-cost solution to sending money. M-Pesa has now been introduced in other countries including Tanzania, South Africa and India.

 

Reason for optimism

Africa is a diverse continent and is not without its challenges. Of course there are risks – notably political, currency and liquidity risks but experts believe that the potential rewards are commensurate with these risks. A final point worth mentioning is that many African markets, for example those of Tunisia, Nigeria, Kenya and Morocco, are often negatively correlated with developed and emerging markets. That’s something that may be worth bearing in mind for those investors seeking portfolio diversification. 

 

– Adapted from Old Mutual Global Investors 2015 Year Book. 

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