The negative perspectives of Africa captured on most international media are not matched by the

reality on the ground. This may well contribute to creating opportunities for international investors,
in frontier African markets, not afraid to seek high returns in a relatively high risk environment.

China’s need for resources has and will continue to be a key driver of African trade, investment and
economic growth. China gets about a third of its oil from Africa, notably from Angola and Sudan,
and Africa also provides huge amounts of its copper and cobalt

In a bid to improve long-term resource security, China has been investing heavily in oil-producing
nations like Nigeria, Angola and Sudan as well as seeking uranium in Niger and copper in
Tanzania. In return China has provided a wide range of support to host countries, including debt-
forgiveness, aid assistance, long-term resource deals and large-scale infrastructure projects.
Collectively, these actions have supported the economic growth of the region and its stability in
recent years as well as producing large net inflows of capital which inadvertently have led to higher
income levels and a need to reinvest some of these in the financial markets. .

According to The Financial Times trade between Africa and China has increased ten-fold in the last
decade from $10bn to more than $100bn hence overtaking the US and Europe as the largest trading
partner with some of Africa’s key economies.

Competition for African resources is also intensifying as African countries increasingly become the
object of interest from other emerging powers including India, Brazil, South Korea, and Malaysia
who are showing an interest not only in the continent resources but also in its billion-strong market
of potential consumers.
The limited integration of many sub-Saharan countries (with the notable exception of South Africa)
into the global economy and consequent decoupling of its financial markets from the developed
world may have contributed to the region’s relative resilience during the recent global recession.
However, a much more important factor is the region’s improved economic strength (GDP grew by
almost 6 per cent in 2010) while that in much of the developed world has stagnated. Africa
currently contains over a billion people and the figure is expected to rise to almost 1.9 billion by
2050.

An important factor from an investor’s perspective is the rising number of people on the continent
with higher incomes who have the means to spend on a wider range of items. According to
McKinsey, Africa has more middle-income households (those earning more than $20,000 a year)
than India despite having a smaller population. Thus in addition to its resource strength much
greater opportunity lies in the region’s own consumption prospects. With an already huge
population that is growing and steadily becoming wealthier, the region’s scope for consuming
goods and services is vast thus creating enormous business opportunities in consumer goods and
services industries.

However, despite the above-mentioned opportunities and potential, Africa remains a relatively
high-risk environment and poses significant barriers to entry for investors. A number of countries
are recovering from long periods of instability and have a high susceptibility to renewed conflict.
This means that good research and in-depth knowledge of local African investment markets is
necessary before venturing into these markets but such a strategy can also offer great competitive
advantage.

Just like most leading emerging markets like Turkey, South Korea, Brazil and others were once
considered obscure destinations for investor funds, these have gradually moved into the mainstream
handsomely rewarding, albeit over time, those investors who were brave enough to take on the
additional risk. However, in most recent times returns in the less lauded frontier markets like Kenya
and Ghana have been much better than those of the more prominent emerging markets 1.

Further, although the region is known for its challenging business environment, particularly for
foreign firms, this disadvantage is offset to some extent by a relative lack of competition, high
growth and low labour costs. These can all support higher corporate profit margins. One way to take

1
While returns for the BRIC countries were -1%, 14%, 17% and 6% respectively those of frontier African markets like
Kenya, Ghana and Nigeria topped 34%, 32% and 19% respectively for 2010 (Bloomberg, 2011).
advantage is to seek out well-managed domestic or regional firms that are market leaders in their
fields, show good growth prospects and have attractive valuations.

Another reason for seeking investment in Africa is that rising correlations between developed and
leading emerging markets means that investors need to look further afield for lower correlation
assets. Frontier markets in Africa thus represent a case in point.

Ultimately, investors will need to find countries that offer the potential for a sufficiently high level
of return at an acceptable level of risk. This can be a research-intensive and time-consuming process
that is probably best outsourced to local practitioners with in-depth regional knowledge and
expertise. Illiquidity and weak institutional structures continue to be a major constraint although
significant variations do exist within the region between countries, which further underscores the
need for good research and local expertise.