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Africa´s illiquid markets show the most potential

19 Apr 2012

Africa’s most illiquid markets are also the ones that show the most potential, says Pieter de Wet, head of research at Novare Equity Partners - the private equity fund manager focused on investment opportunities in sub-Saharan Africa.

He notes that some 90% of all foreign investment portfolio inflows into sub-Saharan Africa go through the Johannesburg Stock Exchange (JSE) because other markets on the continent are not deep enough to support the large amounts of money involved.

“A characteristic of many illiquid markets is that they show the most potential due to economic growth that has been strong relative to developed markets. Although GDP growth has been driven mostly by demand for natural resources from other developing economies like China, other sectors have also contributed notably wholesale and retail, agriculture, transport and telecommunications.”

De Wet says that overall growth and changes in economic sub-sectors are creating business opportunities that are often overlooked by investors.

While mineral resources will remain an important generator of wealth in sub-Saharan Africa, other sectors are also expected to come to the fore as countries rely less on exports and more on robust domestic demand.

Sustained economic growth over the past decade has seen the emergence of a middle class that currently accounts for about a third of the African population, according to a 2011 report by the African Development Bank.

“Africans are also urbanising rapidly, making it easier for businesses to reach increasingly affluent consumers.” says de Wet. “As a result, the region’s fast-growing group of middle class consumers is a major attraction for investing in sub-Saharan Africa.”

Other benefits include commodities and positive demographics, where the trend in terms of size and composition of the population is expected to be the same as that experienced in east Asian economies between the 1960’s and 1990s when most enjoyed strong growth.

“Another advantage of a growing working age middle class is political stability. The big drop in political strife in Africa coincides with the rise in countries deemed democratic.

“On balance, we believe that sub-Saharan Africa offers potentially much higher rewards compared to developed markets over the years ahead. Investments in the consumer boom will do particularly well.

“In terms of accessing these opportunities, and given illiquid stock markets, prospective investors should consider private equity, particularly fund managers with on-the-ground experience in sub-Sahran Africa,” says de Wet.