Africa Could be the Next Big Thing; Too Bad You Can't Invest In It

Quick: without looking it up, write down as many African countries as you can. I got 43, though my geographical placement is…woefully ignorant for some countries. Apologies to those misplaced nations as well as the ones I missed altogether! Despite this, I’m fairly certain that my recollection would place in the top ventile for Westerners; suffice to say that pretty much all of us in Developed countries don’t pay much attention to Africa. To be perfectly frank, the general impression that Africa tends to conjure up in the minds of a typical Developed citizen is on a sliding scale between “National Geographic documentary” to echoes of some combination of widespread famine, AIDS/Ebola/Malaria/insert disease here, and Black Hawk Down for the more jingoistic ilk (and is always, always considered a monolithic entity by everyone, as if the Nile delta and the Great Rift Valley and the Cape of Good Hope are practically next door to each other). Africa has seemed to always be five years away from being five years from turning the corner and pulling itself from Frontier markets to Emerging or even Developed classification. So, is this a fair assessment of Africa at-large, or does the perception of the continent (not to mention the wide array of countries contained therein) need a revamp?

Let’s take a look at how the continent is handling everyone’s favorite current-events topic: COVID-19. Surely these “shithole countries” are struggling to contain the global pandemic? As of February 14th, Africa has recorded 3.78 million cases across an estimated population of 1.22 billion, or about 220,000 fewer cases than the United Kingdom despite having 17.8 times more people. Deaths are even more impressive: less than 100k for the entire continent, or a fifth of the number of COVID deaths as the United States despite having a population 3.7x larger. In fact, the African country struggling the most with COVID-19, South Africa, comes in at just 75th in cases per 1M and 41st in deaths per 1M. Granted, there are varying levels of success across the continent: South Africa has seen a particularly nasty variant of the virus, North Africa is seeing more cases than sub-Saharan Africa, Tanzania is sticking its head in the sand and is claiming that COVID-19 doesn’t exist in the country. An extremely young population distribution and existing infrastructure for handling pandemics also played an important part in keeping cases down, but at the end of the day, if this is how shithole countries are doing in regard to COVID-19, what do we call the ground beneath the outhouse? Asking for most of the Western world.

Ok, pointed jabs aside, what does the response to COVID-19 in Africa have to do with investing in Africa? In Thomas Piketty’s transformative Le Capital au XXIe siècle (Capital in the Twenty-First Century), the author writes on the inherent relationship between return on capital (r) and economic growth (g). His argument boils down to Capitalism’s inherent state being r > g, where return on investments normally outpaces economic growth. However, this relationship can be distorted to make the relationship between r and g equal or even favor g to r. The clearest example of this was the post-WWII boom in the United States economy: as the only major power with its infrastructures intact after the war, the USA saw a decades-long growth where economic growth crushed wealth accumulation before reverting back to (and beyond) the typical wealth inequality expected by the system. While the “Last Country Standing” scenario is merely one of the possible ways to tilt the relationship between r and g, it isn’t the only one. A population that skews young is a population with decades of labor ahead of it, boosting g. Much of the Developed world has a median age above 37, with much of Europe above 40. Africa as-a-whole has a median age of 20, with some countries approaching as low as 15. Obviously that means nothing without work, but that seems to be changing as well.

One of the largest barriers to development in Africa has been due to the near-impossibility of creating continent-wide physical infrastructure. Africa is absolutely massive and full of a variety of nigh-impassable deserts, jungles, mountain ranges, and conflict zones (not to mention the Scramble for Africa making inter-connectivity an impossibility until the removal of colonial control), making a true intercontinental rail or road system pretty much a laughable venture up to this point. But this mindset is a bit backward-looking: when we think of rapid economic growth in a country, it tends to be pictured as its physical infrastructure developed during this growth period. This is why European countries have dense, pedestrian/horse/bike-friendly cities and extensive rail networks, the United States tilts toward suburban sprawl around city centers fed by car-centric streets/highways/interstates, and Asian titans like Japan and China thrive off of massively dense cities with latter-half 20th century high-tech bullet trains to connect the country together.

However, innovation has increasingly moved virtual over the past few decades, making it possible to deliver economic growth with a lesser need for physical connectivity. This has helped Africa immensely: instead of having to traverse to the nearby city to reach a bank, Africans can handle their financials on a variety of mobile apps. Instead of waiting for attention to turn its eye to your out-of-the-way corner of the world, you can raise awareness for your project/problem/people through a slew of social platforms. A virtual infrastructure benefits a continent like Africa because the connection can happen online before any physical traversal is required (or might not be needed at all). Take the Kenyan running shoe brand Enda for example: initially starting on Kickstarter, they are now producing high-quality shoes at-scale and shipping their shoes internationally (one pair of which has found their way to a certain full-of-themself quant in southern California).

Growth via virtual infrastructure can also lead toward headway in physical infrastructure. The promise of growth in Africa has led to major gains in progress on trans-continental highways and railways, though border closures and issues with outside investors are making said progress move in fits and starts. “Fits and starts” is also an apt phrase for African politics, which can impress at-times in the breadth and ingenuity of its corruption. Remember earlier when I mentioned that the median age in Africa is 20? Well, the median age of African heads-of-state is over triple that at 64. The post-colonial governance mindframe and the populace are seeing increased tension between one-another, leading to an uptick in protests and opposition with a variety of successes and failures across the board. Like an earthquake, its hard to know when the inevitable slip-strike between the aging ruling class and the general public will occur, but when it does be ready for fast progress.

Convinced about the validity of the above pontifications and want to allocate some of your investment portfolio toward the potential of Africa? Well, that’s where things get tricky. Country-based ETFs for Africa are essentially limited to South Africa, Nigeria, and Egypt, and “Africa-focused” ETFs are going to be “South Africa + a handful of companies from other countries”. In fact, this “tossed-in” aspect is prevalent to Africa as-a-whole when it comes to equities: North African companies tend to be tossed in to Middle East indexes and ETFs, and sub-Saharan companies tend to be tossed in with any Frontier-based index or ETF (the one major exception is MSCI, who have a relatively impressive 17 African countries indexed). Why? Well, while most countries in Africa have a stock exchange, they tend to be quite illiquid, sparse, and imbalanced in terms of offerings. Because of this, very few of the big names in global finance don’t wish to deign to providing access to these markets to the public. This means that investing in a country has to be done at the local level: connecting with a local broker in Accra or Kampala or Windhoek, placing an order, and then waiting for it to get filled. This pretty much removes active strategies from contention, as there’s no guarantee when or even if your buy or sell order will be filled.

However, that’s not to say that there isn’t a path to investing in Africa equity-wise. While active strategies are essentially impossible due to a lack of required liquidity, a buy-and-hold strategy doesn’t require a lot of in-and-out repositioning, allowing for investors to rebalance on a relatively-leisurely quarterly, semi-annually, or annually basis. African exchange data is out there if you know where to look: while the current track record of GAIA (with its free pipeline of data) is limited to only 50 countries, the full version looks at 106 countries, 21 of which are in Africa. Once Novatero is tapped into the paid data pipeline, there’s very little preventing us from building out an offshoot of GAIA that focuses solely on African countries with an annual rebalance. We could even try out a version that forgoes country bucketing and focuses on the equity level, allowing this hypothetical Africa-focused fund to flow across the continent as-needed to find promising companies each period. It’s an exciting prospect, and one that we can’t wait to dive into once we’ve taken care of the rate-limiting steps in our way.

Africa has always seemed like the land of potential growth, but one that always saw something else come along to slow or stifle progress. However, despite our japes toward well-worn tropes, this time really does feel like it could be different for the continent. The barriers that prevented growth for Africa in the past aren’t as much of an impediment in today’s landscape, and said barriers are being chipped away from both internal and external pressures. There’s still a long way to go: political, infrastructural, and societal changes are going to be necessary before true growth occurs, but the winds are favorable. Unfortunately, the current investment landscape is illiquid, sparse, and difficult to get into without an extremely high amount of capital. However, there are paths through this, and Novatero will be working on bridging the gap as much as possible as we go forward. We don’t know exactly when it will happen, but we want to be well-positioned when all that potential finally makes the shift to kinetic, and we want you there right next to us.