The Case For Africa: Still Growing Despite Challenges to Global Markets
Equity markets around the globe have been challenged this month, with concern over the United States’ spending policies driving headlines, and worries over European debt markets sending markets lower worldwide. Notably, markets were shaken by continued trouble in Europe, as bad debts in the ‘PIGS’ (Portugal, Ireland, Greece, and Spain) are pointing to the necessity of future actions to stabilize the European monetary union. Africa’s markets have reacted negatively in tandem with a global fall in equities, as rising fear has led to a broad flight to safety worldwide.
In the short term, we believe that the situation in the Euro zone will need to be resolved in order to restore confidence to global markets. We expect that the Euro zone will take further steps towards this end in the very near term, and believe that concern will be mitigated by the end of 2011. This resolution could come in the form of a tight integration of fiscal and monetary initiatives among the EU; a breakup of the Euro, an increase in size in both the European Central Bank and European Financial Support Facility liquidity and guarantee programs; a restructuring of the debt of Greece, Italy, and Spain; or by any combination of the above. In most cases, the short term growth outlook for the EU region is poor.
However, the case for investing in Emerging Markets, most notably Africa, remains strong. First and foremost, the growth prospects for Emerging Markets are significantly higher than those of the Developed world. Emerging Market economies have for the most part less debt, young populations, and lower entitlement spending requirements than Europe and the United States, and valuations in their stock markets are more attractive. We believe that, over time, Developed Market investors will continue to increase their allocations to Emerging Markets. This process, which is likely to continue for decades, means that investors who put money into these markets now will be able to capitalize on growing interest in years to come.
On the other hand, a leveling off of commodity prices from a growth slowdown in Developed Markets will improve real consumer spending power, supporting consumption in most economies, especially within Emerging Markets. In fact, for a number of months we have believed that commodities were likely to be challenged in the short term as concerns over global growth rose. Notably, concern over inflationary pressure stemming from high oil and food prices has been suppressing returns in Emerging Markets year to date, as consumers have been forced to use more of their income to purchase basic commodities. Should that change, we would expect to see Emerging Market consumers increase their spending, which would be a positive sign for these markets. In addition, we have already seen Emerging Markets across the globe – including many of Africa’s nations - raise interest rates in order to curb inflationary pressure. However, we believe that the cycle of monetary tightening is coming to an end in the Emerging world, and that consumer spending will drive returns in the short term. To that end, we believe the opportunity for investing in consumer goods, which we feel will prove protective during increased market volatility, has become more compelling.
In the longer term, we continue to believe that growth in Developed Markets will remain anemic over the coming years, as high debt levels, unemployment, and entitlement spending will make it difficult for sustained growth to occur. On the other hand, Emerging Markets – most notably Africa – have demonstrated strong growth over the past few years, and are expected to continue their expansion over the coming decade. Thus, investors who are seeking opportunities for growth should continue to seriously consider allocating capital to the continent of Africa. We continue to see Africa as the best exposure to have among various investment options due to slowing growth in the US and other Developed Markets. We also view Africa as favorable relative to other EM economies that may be overly dependent on US or EU growth. We see the growth story in Africa as a secular trend, supported by increasing urbanization, rising real incomes, improved economic policies, and long needed large infrastructure investments. We believe that once these changes have been kicked off, the process will continue to build on itself to create long term growth. Although in the short term Africa’s markets have been challenged along with those of the rest of the globe, the long term investment opportunity makes this a compelling time to buy.
In the short term, we believe that the situation in the Euro zone will need to be resolved in order to restore confidence to global markets. We expect that the Euro zone will take further steps towards this end in the very near term, and believe that concern will be mitigated by the end of 2011. This resolution could come in the form of a tight integration of fiscal and monetary initiatives among the EU; a breakup of the Euro, an increase in size in both the European Central Bank and European Financial Support Facility liquidity and guarantee programs; a restructuring of the debt of Greece, Italy, and Spain; or by any combination of the above. In most cases, the short term growth outlook for the EU region is poor.
However, the case for investing in Emerging Markets, most notably Africa, remains strong. First and foremost, the growth prospects for Emerging Markets are significantly higher than those of the Developed world. Emerging Market economies have for the most part less debt, young populations, and lower entitlement spending requirements than Europe and the United States, and valuations in their stock markets are more attractive. We believe that, over time, Developed Market investors will continue to increase their allocations to Emerging Markets. This process, which is likely to continue for decades, means that investors who put money into these markets now will be able to capitalize on growing interest in years to come.
On the other hand, a leveling off of commodity prices from a growth slowdown in Developed Markets will improve real consumer spending power, supporting consumption in most economies, especially within Emerging Markets. In fact, for a number of months we have believed that commodities were likely to be challenged in the short term as concerns over global growth rose. Notably, concern over inflationary pressure stemming from high oil and food prices has been suppressing returns in Emerging Markets year to date, as consumers have been forced to use more of their income to purchase basic commodities. Should that change, we would expect to see Emerging Market consumers increase their spending, which would be a positive sign for these markets. In addition, we have already seen Emerging Markets across the globe – including many of Africa’s nations - raise interest rates in order to curb inflationary pressure. However, we believe that the cycle of monetary tightening is coming to an end in the Emerging world, and that consumer spending will drive returns in the short term. To that end, we believe the opportunity for investing in consumer goods, which we feel will prove protective during increased market volatility, has become more compelling.
In the longer term, we continue to believe that growth in Developed Markets will remain anemic over the coming years, as high debt levels, unemployment, and entitlement spending will make it difficult for sustained growth to occur. On the other hand, Emerging Markets – most notably Africa – have demonstrated strong growth over the past few years, and are expected to continue their expansion over the coming decade. Thus, investors who are seeking opportunities for growth should continue to seriously consider allocating capital to the continent of Africa. We continue to see Africa as the best exposure to have among various investment options due to slowing growth in the US and other Developed Markets. We also view Africa as favorable relative to other EM economies that may be overly dependent on US or EU growth. We see the growth story in Africa as a secular trend, supported by increasing urbanization, rising real incomes, improved economic policies, and long needed large infrastructure investments. We believe that once these changes have been kicked off, the process will continue to build on itself to create long term growth. Although in the short term Africa’s markets have been challenged along with those of the rest of the globe, the long term investment opportunity makes this a compelling time to buy.
Darell Hammond, KaBOOM! (USA and Mexico)
Elizabeth Hausler, BuildChange (China, Indonesia, Haiti)
Dan Viederman, Verité (Latin America, Southeast Asia, China)