africa-the-hottest-investment-destination

Africa the hottest investment destination

Affordable technology and oil revenues have boosted economic growth rates and changed the fate of Africa.
Investors have in the past few years been focusing on the markets in China and India û and may not have noticed that these countriesÆ demand for resources has also boosted growth in Eastern Europe, the Middle East and Africa. This region, also referred to as EMEA, is home to more than 80% of the world's proven oil reserves - as well as many other commodities û not to mention a large part of the world's population.

In recent months, many of the worldÆs major stock markets have been spooked by the subprime loan woes, but some markets have been able to shake off these concerns and continue to grow strongly. Within the EMEA region, Africa is proving to be an ideal alternative investment destination that is underrepresented in many investors' portfolios.

One reason why Africa is often under-appreciated by investors, and which also explains its potential, is that media has constantly portrayed Africa as a poverty-stricken and politically unstable region. In fact, the continent has changed remarkably due to the availability of affordable technological goods and oil revenues over the past few years.

The overall African economy is expected to grow at 6.2% in 2007, compared with 5.5% in 2006. Countries such as Ghana, Botswana, Uganda, Zambia, Mozambique, Namibia and Nigeria are showing gross domestic product growth rates that are three- to four-times faster than those of the developed economies in the Euro zone. The Ghana Stock Exchange is one of the worldÆs best performing stock markets, while Botswana boasts one of the highest per capita government savings rates in the world.

Demand for African oil

The economic ascent of AsiaÆs giants, China and India, has changed global market demand for oil irrevocably û and the speed of growth accompanied by the modernisation of these two nations bring further impact on global supply and demand trends.

While the EMEA is set to be a prime beneficiary of this trend, Africa is an important player in the global crude oil market. West Africa has already achieved strategic importance as a source of energy û with Nigeria, as the giant of the region, supplying 10%-12% of imported oil in the US.

Africa (Gulf of Guinea) has received close attention for several reasons. African oil is high in quality, with a low sulphur content that requires little refining to get to the pump. The GulfÆs close geographic proximity to the US, the worldÆs biggest oil consumer, cuts shipping costs and - as most of the reserves are offshore - the need to construct pipelines across countries to transport the oil to the market is eliminated. An equally important factor is that unlike other oil-rich nations, African nations are not averse to foreign companies drilling in their oil fields. African oil is cheap, safe and more accessible than in other parts of the world, and there is seismic evidence that there is more oil to be discovered in areas such as Sao Tome.

The robust demand for African oil in the US is expected to continue in the coming decades. The US State Department said in 2005 that West African oil is a ôstrategic national interest" and the US National Intelligence Agency has forecast that Africa (Gulf of Guinea) will supply 20%-25% of total US imports by 2020.

The strong demand for African oil has also generated cash windfalls to many regional economies. This has helped transform some of Africa's poorest countries from subsistence economies as the sale of oil is enabling their governments to build new infrastructure, create jobs and spur consumer spending.

Supply of cheap technological goods

Africa is also benefiting from the supply of cheap, affordable technological goods from China and India. The latter two countries have long been exporting an array of cheap manufactured goods to Africa. The availability of $20 mobile phones, $100 laptops and $2,000 cars to Africans has had a profound impact on emerging economies. This technology has helped improve AfricaÆs productivity, efficiency, communication, healthcare, education, civil participation and urban and rural development. The combination of all these benefits means that Africa is now moving to bigger business and faster GDP growth.

Of all the technological goods, the mobile telephone handset has had the biggest impact on economic growth in developing countries. About 62% of businesses in South Africa and 59% in Egypt say mobile phone usage is linked to a rise in profits. A developing country which has an average of 10 or more mobile phones per 100 people has a 0.59 percentage point higher GDP growth than an otherwise identical country.

EMEA Funds û a new channel to tap into the African market

Investors who are not very familiar with the Africa market may consider capturing these opportunities through an EMEA fund. With low correlation to Asia, the US, Europe and the UK, this kind of fund can offer diversification benefits and the potential for risk-adjusted returns. The Fidelity Funds-EMEA Fund provides easy access to this next generation of emerging markets, taps the significant growth opportunities in these markets as well as the commodity and infrastructure sectors, and is more diversified than emerging country-specific funds such as Russia or South Africa.

The market is best suited for investors with a long-term investment horizon who are not swayed by short-term fluctuations and negative performance.

This story first appeared in the Private Capital supplement that was published with the November issue of FinanceAsia magazine.
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