Paul Clark: Africa always brings something new – a worthy investment opportunity

When Pliny the Elder referred to a Greek proverb about Africa nearly 2 000 years ago, he said "Semper aliquid novi Africam adferre." Although he, and the Greeks before him, were referring to the abundance of "strange" animals on the continent, there is no doubt that innovation and entrepreneurship are ever present in Africa.

Technological advances

Many people will be aware that Africa used mobile phone technology to leapfrog the need to roll out fixed line networks. The uptake of this technology by urban and rural communities and the growth in demand surprised many observers. The benefits of access to previously unavailable information (of market prices for agricultural goods, for example) are enormous and mobile phone users diverted disposable income, no matter how scarce, to this new technology.

The next innovation that is being taken up by more Africans than anyone else globally is mobile money. By the end of 2013, 52% of all mobile money platforms were in Sub-Saharan Africa and 42% of all new deployments were planned for the region. It is important to clarify what is meant by mobile money. Mobile money platforms do not refer to mobile banking i.e. using your mobile phone to access your bank and bank account. Mobile money is a form of electronic money and users do not need to have a bank account to use it.

Once again Africans are leapfrogging the need to roll out bricks and mortar branches in order to bank the enormous number of unbanked people, especially in difficult to reach rural environments. Banks are not standing back and watching this happen, but are collaborating with mobile phone operators as well as developing innovative channels and agency models to be able to reach new customers cost-effectively. The benefits to mobile money customers are undisputed and reflected in the fact that by the end of last year there were nine Sub-Saharan African countries with more registered mobile money accounts than bank accounts (up from four a year earlier). It is incredible to think that soon most Africans will have used their mobile phones to "bank" their cash and transact with each other without ever having set foot in a bank branch – or ever using internet banking for that matter (another leapfrog)!

Politics: democracy and difficulties

On the political front we have seen significant changes and improvements across the continent over the past few years. Last year, well run Kenyan elections followed a new constitution that devolved more government functions and accountability to local county level, thus deepening the democracy in the country. Tunisians have just been to the polls as their Jasmine revolution three years ago finally leads to a new secular and democratic state. Unfortunately, the many examples of positive change have been marred by political difficulties in some smaller economies. The Central African Republic and, more recently, the coup d'état in Burkina Faso are examples of these.

However, although the coup d'état hit the headlines, the narrative should reflect how regional leaders and the African Union have intervened quickly to replace the military with a civilian leader to manage the transition to elections next year. Within a week of the coup d'état the presidents of Senegal, Nigeria and Ghana travelled to Burkina Faso on behalf of the Economic Community of West African States to facilitate the rapid resolution of the political crisis in that country.

The Economist Intelligence Unit (EIU) has studied democracy across the world in detail using 60 ratings grouped into electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. The results for the 18 African countries that are more investable are shown in the figure below (Fig. 1).

The reduction in authoritarian regimes and increase in the average score in just the last three years is clear from the chart. There is a similar trend for the 49 African countries (ex SA) that the EIU covers, which shows that the political improvement we perceive by following the changes on the ground can be validated by detailed analysis.

Under the EIU definitions, flawed democracies have free and fair elections, but there are other concerns like an underdeveloped political culture and low levels of political participation. Interestingly, authoritarian regimes can have elections, but these are in seriously compromised environments.

Business is booming in Africa

Not only is the political environment improving across Africa in general, but so is the business environment. A regular traveller to countries across the continent will notice this improvement from year to year, but the World Bank studies this in detail in their annual "Doing Business" analysis.

We use the Doing Business "distance to frontier" measure as this score aids in assessing the absolute level of regulatory performance in a country and how it improves over time. The chart below shows that business environments in Africa have been consistently improving against global best practise over the last ten years.

We have plotted the "Global Best" country for ease of doing business, which is Singapore in all ten years shown. We show Mauritius, which is reported as the easiest place to do business in Africa in every year from 2006 to 2015 according to the survey, that has improved its score from 61% to 75% over the period. On the other hand, countries that have emerged from quite difficult domestic situations, like Rwanda, Sierra Leone and Mali, have shown significant improvements over the past few years. But most encouraging is the trend we see for the continent as a whole (excluding South Africa) – a change from 42% to 51% over the period.

This data shows that even as the world has become easier and easier for businesses, Africa has improved faster. Despite setbacks in some countries, we are encouraged by the trend in the leading economies and regional powerhouses where the pace of improvement tends to be increasing. More importantly, in the World Bank's latest analysis, out of the top ten improving countries globally over the previous year, five were from Sub-Saharan Africa. Sub-Saharan Africa countries also accounted for the largest number of regulatory reforms in the year with 70% of these economies having at least one reform that improves the business environment.

With all these positive changes happening across the continent as well as the innovative and entrepreneurial nature of African businesses and governments it is no wonder that the International Monetary Fund ("IMF") expects that seven out of the ten fastest growing economies over the next five years will come from Africa.

The chart below of the latest IMF forecasts shows that the combined economies of Africa excluding South Africa are expected to have a faster rate of GDP growth than that of the world over the next five years.

With such positive developments it is no wonder that African businesses are investing in growth opportunities. This is evidenced by the use of stock exchanges to list and also to raise additional capital through rights issues, which are becoming more frequent. Many African businesses are also expanding regionally or across the continent. Nigerian banks have regional strategies, with United Bank for Africa for example having 18 operations in other African countries, as far afield as Mozambique. Qalaa Holdings, a listed Egyptian investment company, is investing in the East African Rift Valley Railways concession on the Mombasa – Nairobi – Kampala trade corridor. South African retailers are also expanding operations into Sub-Saharan Africa and by the end of 2012 had an estimated 700 stores in total on the continent outside of their home market. These are just a few examples of the investments Africans are making to benefit from the opportunities they see in African economies.

We expect that these trends will continue across the continent. The improved (and improving) macroeconomics, combined with favourable demographics and increasing stability in political environments, should form the backdrop to a continuously improving operating environment for companies across Africa. The increasing urbanisation that we see (Africa as a whole is more urbanised than India and similar to that of China) and the rise of the middle class African consumer will lead to growth in disposable income and spending on goods and services. African equity markets outside of South Africa continue to broaden and deepen.

In summary, investors should consider the exciting investment opportunities on the continent of Africa, as these can offer diversified and high growth investments and, after all, Africans themselves are already investing there.