New York-based Analyst Dilip Badlani offers his thoughts on Africa, where he spent 10 days visiting Kenya and Tanzania. We have previously offered our thoughts on South Africa. Of the public markets in Africa, South Africa is the only market that is classified by the Russell Indices as an "Emerging Country"; all the other markets are classified as "Frontier Countries."
"Space: the final frontier." I heard that phrase often as a child because of the popularity of Star Trek. When I entered the investment business, I discovered another definition of the final frontier: the markets of many African countries. While I had a personal interest as my family has business in parts of the continent, I realized investors often dismissed Africa because of its relatively small amount of GDP, entrenched political problems, and anemic growth rates.
While the total GDP of Africa is still small—less than 3% of Global GDP1-the growth rates of several African countries have been among the fastest in the world over the past decade, thus making it increasingly relevant for today's globally focused investor.
The Growth of Africa
From 2000-2010, six of the 10 fastest growing economies in the world were African. Buoyed by the increase in commodity prices, the economies of Angola and Nigeria were among the fastest growing in the world. Remarkably, Rwanda, a country plagued by genocide in the early '90s and without the natural resources to benefit from higher commodity prices, also made the list. Ethiopia is another example of a country that has been able to grow despite its lack of oil resources. When I learned that Ethiopia is now the world's tenth largest producer of livestock,2 I was struck by the contrast to the image I remember from childhood of watching Bob Geldof's efforts to fight the devastating Ethiopian famine.
Given the significant amount of resources in Africa-10% of the world's oil reserves, 40% of its gold, and 80-90% of the chromium and the platinum metal group-the continent has clearly benefited from an increase in commodity prices. However, resources accounted for only about one-third of the growth on the continent.3 The remaining two-thirds came from other sectors, including wholesale and retail, transportation, telecommunications, and manufacturing.
As a child, I often spent time in my father's office as I enjoyed exploring the samples of various goods he was exporting from China to Africa. In retrospect, it has been amazing to look back on the evolution in the sophistication of products being imported into Africa. This move up the product chain may partially have been driven by an increase in the production of value-added goods produced in China. Yet credit also goes to upwardly mobile Africans who have demanded better quality products.
The African continent has seen a solid increase in its proportion of middle class citizens over the last two decades. While this increase may not be as impressive as that of China, it merits attention nonetheless. The African Development Bank states that Africa's middle class had risen to 313 million people in 2010, 34% of the continent's population – compared with 111 million (26%) in 1980, 151 million (27%) in 1990 and 196 million (27%) in 2000.4 While its definition of middle class may have been a little too broad – it defined middle class as people who spend the equivalent of $2-$20 a day and acknowledged that many living on $2-$4 a day are "floating" and could easily slip back into poverty. Taking these people out of the equation puts the stable middle class at 123 million, or 13% of the population.5
The developed economies of the world are currently suffering from aging populations and a lack of population growth. Africa is currently the world's second most populous continent with a population of one billion people6 and is expected to see its population more than double by 2044.7 The fertility rate in Africa is expected to decline over this period from 4.6 children per woman in 2005-2010 to 3.0 children per woman in 2040-2045. Today's high fertility rates in Africa can be attributed to a variety of causes, among them, poor education, limited access to or approval of birth control, and historically high mortality rates. However, in a 2008 study, the U.N. Population Division estimated that for the first time in about two decades no single African country would experience a negative population rate of growth as a result of HIV/AIDS.8 The increase in the overall size of the population will create a significant challenge in terms of available resources, but it also has the potential to provide a demographic dividend similar to that enjoyed by other economies that have seen an increasing portion of their population enter the workforce.
One of our investments at Royce is a healthcare company headquartered in South Africa. The company's management team possesses the local knowledge to be able to operate in various countries in Africa while running manufacturing facilities that