There are many misconceptions about Africa and African investing. One of the more common remarks we hear when introducing Africa to potential investors is: "I know this is a high-risk investment with a high potential return."
If we use the MSCI index for Africa excluding SA and compare the returns and volatility of this index to a range of other global indices, we can see this is simply not true.
Looking at data from June 2 2002 (the earliest available for Africa ex-SA) to April 30 2018, African equity markets, excluding South African, have outperformed developed, emerging, frontier markets and the S&P 500 index. In addition, the volatility of these returns has been similar to those for developed markets and even less than that of emerging markets.
This data clearly dispels the myth that investing in African equities can be associated with higher volatility, even if the returns are better. Our data also shows that an active manager investing in these markets can generate between 3% and 4% alpha a year, which improves returns even more. It is unlikely that active management in more developed markets could match this over a long period.
In addition to providing good risk-adjusted returns, investing in Africa also has diversification benefits for a global portfolio.
Global emerging markets (GEM) have a high correlation of 0.81 to developed markets, whereas Africa excluding South African equity markets have a very low correlation of 0.24. This means a global portfolio including Africa will be significantly more diversified than a simple investment in GEM.
Of course, no one would invest in Africa, or any asset for that matter, based on historic returns, even though African returns have been good. Investors need to believe that the continent has improving economic growth, better business environments and more stable politics.
This is another area where misconceptions arise. The news flow from Africa typically focuses on the worst issues and incidents that occur on the continent. However, on the ground and across the continent, growth is continuing, infrastructure is improving and business conditions are getting better. As investors who travel across the continent regularly, we observe these trends first hand, but these are also clear from surveys and economic measures.
Consider the accompanying graph showing GDP growth on the continent from 1990 to 2023. If one groups together African economies (excluding SA), it would be easy to conclude that the enthusiasm in the first decade of this century for the improved operating environments, favourable demographics, increased urbanisation and growth of the middle class was short-lived, as growth slowed dramatically after 2010.
However, if one excludes the effects of the Arab Spring and oil price collapse from these numbers, the rest of the continent continued on an improved growth path, and for them the Africa Rising narrative never stalled. Oil-exporting countries are likely to remain a drag on overall economic growth in the future, but of all the countries in this grouping, only Nigeria has an investable equity market.
Excluding oil-exporting economies, we can expect GDP growth rates for most African economies to continue to increase over the next five years with aggregate growth approaching 6%.
Our observations, as well as regular analyses by the World Bank, IMF and others, show that operating environments for firms have also been improving over the past 12 years. We should see improvement for Egypt and Nigeria in releases, now they have resolved foreign currency shortages.
Are we seeing a new dawn in African politics too? Throughout most of 2017, the four longest-serving rulers in the world (except for royalty) were from Africa. By the end of the year one, Jose Eduardo dos Santos from Angola, had stepped down and another, Robert Mugabe from Zimbabwe, had been forced to resign. We’ve also seen peaceful transfers of power in SA, Botswana and Liberia. The African "strongman" politics seems to be a thing of the past.
There is also a general sense that democracy is improving across the continent, aided by improved communication and a younger generation who hanker for better economic management. According to the Economist Intelligence Unit’s democracy index, which considers factors including civil liberties, political participation, and electoral process and pluralism in 168 countries, the number of Africans living in authoritarian regimes has declined from 74% in 2010 to 48% in 2017.
Hopefully we have been able to show that our optimism for the African continent can be backed up by data and analysis by global institutions.
We also believe investors can access this growth through equity investments in domestic African companies that will not only benefit from the anticipated growth, but also from improving infrastructure and business environments as well as better political governance.
Investing in African equity markets should decrease the volatility of a global portfolio and provide significant diversification benefits, while generating good returns. We therefore believe that investors should invest a portion of their portfolios over the medium to longer term in African equities to benefit from this growing region.
• Clark is Africa fund manager at Ashburton Investments.