“Miracle of Africa” Stands in Sharp Contrast to Europe and U.S.


Clifford D. Mpare, CFA, Frontline Capital Investors

Africa is growing economically and is rich in commodities. The continent has favorable demographics and consumers with rising purchasing power. And even as its financial sector is developing, inefficiencies in Africa’s financial markets offer investors opportunities for alpha.

That, in summary, is the case for investing in Africa, according to Clifford D. Mpare, CFA, Executive Chairman and CEO of Frontline Capital Advisors Limited, an investment advisory and consulting firm based in Ghana. Mpare outlined the bullish case for Africa last week before more than 200 investment professionals who attended the fourth annual CFA Institute European Investment Conference in Paris.

Using data from the International Monetary Fund and The Economist magazine, Mpare showed that of the world’s ten fastest-growing economies from 2001 to 2010, six — Angola, Nigeria, Ethiopia, Chad, Mozambique, and Rwanda — were African. Not only is Africa still growing at a fast pace, he added, but the average growth rate is also higher than that of Asia, and is forecast to remain so.

Ghana’s economy, Mpare explained, is likely to grow at 17.5% in 2011, the highest GDP growth rate in the world. Meanwhile Nigeria, the most populous country in Africa, had a debt-to-GDP ratio of just 18% in 2010, compared to 100% for Greece. This “miracle of Africa,” as Mpare called it, stands in sharp contrast to Europe and the United States, which are both struggling to recover from the ongoing financial crisis.

Mpare, who returned to Africa after working in the U.S. financial sector for many years, identified Africa’s natural resources — particularly commodities — as a significant driver of the continent’s economic growth. He suggested that commodity price forecasts often show an upward trend, and Africa has a significant share of the world’s reserves, from oil and gas to platinum and even diamonds. Mpare argued that this time the upward trend in commodity prices is not cyclical but rather secular, thanks to demands from growing economies like China, and that Africa stands to gain from this trend.

Sustained economic growth supported by commodities is increasing the purchasing power of consumers in Africa, and is both feeding and fuelling further growth, Mpare said. For instance, he noted that “mobile phone penetration was over 50% in 2010, having grown from 1% in 1998.” Africa’s demographics also favor growth as the continent is young — even younger than Asia — and its economic growth will create demands in other sectors, such as education and health care, Mpare contended.

Fourth Annual CFA Institute European Investment ConferenceFrontline’s CEO suggested that there is a lot of room for future growth: even though Africa is home to 12.3% of the world’s population, it still controls less than 2% of global GDP. This imbalance, according to Mpare, is good news for investors because “a rise in purchasing power parity GDP per capita from $1,000 to $5,000 can lead to a ten-fold increase in the stock market.”

These wider changes in Africa are also complemented by changes in African financial markets, Mpare noted. There are now 18 stock markets in Africa, and while they may be small and illiquid, the rise in the continent’s combined market capitalization from $113 billion in 1992 to $1.05 trillion in 2010 suggests things are improving. Mpare pointed out that pension assets in Africa relative to GDP have much room for growth with the increase in employment and savings.

Mpare explained that financial markets in Africa may not be as efficient as in developed markets — for example, there may be only a few analysts following a given stock, and it is possible to earn a higher return than what is justified by the risk.

In addition, Mpare asserted that the perception of corruption in Africa is worse than reality, and he used data from the World Bank and Transparency International to make the case that doing business in sub-Saharan Africa is not necessarily riskier than in Brazil, India, Russia, or China.

While Mpare acknowledged that some African countries like Angola and Nigeria do not fare well on the Global Corruption Perception Index, he also pointed out that Botswana is one of the least corrupt countries in the world. Mpare added that political changes are reducing corruption in Africa, and that the risk of corruption is on the decline.

As Africa grows and changes, Mpare contended, it is not a bull or bear market but rather a “lion market”: one that is high risk with the potential for high return — and not for the faint-hearted.

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