Is Africa the next Asia?

23rd May 2012

Africa Day falls on 25th May and has been an annual celebration of the hard-fought achievement of African nations to obtain their freedom from European colonial powers for many years.

Nowadays, these celebrations are also used around the world to highlight African unity, diversity and success, as well as the cultural and economic potential that exists on the African continent.

Although the world's second largest continent, Africa is still largely untapped from an investment point of view. It is said to possess 99% of the world's chrome resources, 85% of its platinum, 68% of its cobalt and 54% of its gold. Not to mention the oil and gas reserves it has on offer.

But perhaps now, given some help with technical know-how and investment to aid with the extraction of materials, the world's poorest continent can be part of exploiting these resources themselves and help build a brighter future.

Africa also has a young population (the average age is only 20 compared with an average of 40 in the developed world) and a growing middle class. Indeed, the number of households earning more than US $5,000 is estimated to jump from 85 to 128 million in the next 10 years.

Abundance of resources, young populations and growing middle classes are all characteristics of other, successfully developing economies and markets, and the long-term potential is undeniable. Some estimates go as far as to say that growth is expected to be around a level of 7% annually in the next 20 years and, while not immune to the huge global problems we are now facing, the region did manage to grow in the middle of the 2009 global recession – something only replicated by Asia.

However, the majority of countries in the region are still classed as frontier markets and investment is both risky and limited – stock markets are still to develop and can be illiquid.  There are also still plenty of political risks, regulatory issues and 55 very different countries which need to be understood thoroughly by anyone investing there.

As a consequence, most professional investors still use South Africa as the main gateway to the rest of the continent – in much the same way as investors once used Austria and Germany to gain access to the emerging markets of eastern Europe.

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The Financialist

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