Allocation and Africa

At this rate, it won't be long before many more investors are breaking out "Africa" (even excluding South Africa) as a region unto itself in their asset allocations, rather than lumping it with Middle East, Developing Europe and other regions.

Tens of billions of dollars of investment (in many forms) have poured into Africa at an accelerating rate.

• Yesterday, for example, China offered Nigeria insurance cover of $40-50b to help fund investment in Africa's biggest oil producer.
  
• Private investments have also been pouring to develop not only oil and mineral resources but also telecom, infrastructure and financial assets.
  
• And Africa's trade with some nations is rising exponentially; the IMF reported last month: "Two-way trade flows between Africa and China have been growing rapidly. Between 2001 and 2006, Africa’s exports to and imports from China rose on average by more than 40 percent and 35 percent, respectively, significantly higher than the growth rate of world trade (14 percent) or commodities prices (18 percent)," which is a combined increase from $10b to $55b."
  
• Many African stock markets have soared in the past two or three years, attracting (and further driven by...
  
• Western hedge funds and African funds being launched and working hard to gain exposure. Brokerage businesses in Africa have also been improving,
  
• and we find several instances of Western-educated ex-pats from Africa returning to start companies, both non-financial and financial. Databank Group (an investment bank) in Ghana, founded by Ken Ofori Atta, is an example. Another is a fund being raised by Tutu Agyare, highlighted in an FT article this week.
  
• At the ground-level, we see many reports of Africans applying both new and basic science to agriculture in Africa, and seeing dramatic increases in productivity, versus incremental increases on already-developed Western farms.
• Solar power investments are also arising in Africa, thanks to the weather patterns and the rapid development of lower-cost solar technologies and production methods outside Africa. (Even on the most micro level: we've read of some Nigerian villagers.

Political instability, erratic policy, inflation, corruption, disease and history's gamut of challenges meet many African nations, although less-so after decades of gradual reform. And now the increasingly sophisticated, wealthy and resource-hungry Developing Markets (particularly China, Russia and India), as well as Western investors, are putting assets to work there, and indigenous enterprises are becoming much more prominent as well. Some of the developments would stun casual observers of Africa: Rwanda launched a stock market this year, in part to float the companies intended for privatization. Articles citations by RGE Monitor, and its own articles such as "Africa Growing at Unstoppable Momentum?" offer helpful overviews (located here).

Some Western investors, even those without employees in Africa, are getting a foothold. We read of several hedge funds making big country-bets, new hedge funds forming, and the occasional Western mutual funds finding pockets of liquidity as well. Retail investors will be able to gain only scant access for now, and not without a lot of work to gain reliable access and research to identify the opportunities. But things are slowly changing. The FT reported on the launch of the Duet Victoire Africa Index to track the largest stocks across sub-Saharan Africa outside of South Africa. Asset allocators will raise an eyebrow that correlation among the African stock exchanges is much lower than in Developed continents, according to the Index's originator. That's in addition to the low correlation that many African markets will have with non-African markets in the same asset class, as we mentioned in our post "Asset Allocation: New Paradigms."