Outperforming Political Risk

Navigating, as opposed to avoiding political risk, has benefited savvy investors. Political risk can take many forms, from strikes and regulatory changes to military coups. Severe strikes and unrest in South Africa and military coups and counter-coups in Egypt have roiled investors over the past couple of years. But in local currency terms, both the top Egyptian blue chips represented by the EGX 30 and the South Africa stock markets are at or near record highs and have even, as shown in the chart below, both beaten the Global Dow stock index (GDOW) and that of the Dow Jones industrial index (INDU).

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Consolidation of Exchanges

Striking miners hold weapons as they wait to be addressed by former African National Congress Youth League (ANCYL) President Julius Malema outside a South African mine in Rustenburg

High profile merger and acquisition activity among stock exchanges has become the norm over the past decade, most recently with the New York Stock Exchange takeover.  Lacking scale, technological efficiency and liquidity, consolidation of Africa’s twenty plus exchanges would make sense.  Such an infrastructure would have the potential to attract considerable foreign investor interest.  A recent Ernst and Young
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Democracy and economic growth in Africa

Striking miners hold weapons as they wait to be addressed by former African National Congress Youth League (ANCYL) President Julius Malema outside a South African mine in Rustenburg

Democracy in Africa

The link between democracy and economic growth is controversial.  But the link between stability and economic growth is proven.  Africa is becoming more democratic and democratisation in Africa is often symptomatic of a society becoming more stable and more open to economic growth.

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Africa Power Overview

Striking miners hold weapons as they wait to be addressed by former African National Congress Youth League (ANCYL) President Julius Malema outside a South African mine in Rustenburg

The problem and the solution

The energy sector in Africa represents the single biggest investment opportunity and also  the toughest obstacle for investors.  The shortage of power in Africa is felt in all walks of life; the home, industry, competitiveness of manufacturing, tourism and even healthcare.  Where there are power plants, they are often inefficiently run – operational inefficiencies of power utilities cost Africa US$ 3 billion per annum divided evenly between distribution losses and revenue undercollection (average for the continent is 88%).
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Agriculture in Africa

The Opportunity

The African agricultural sector is symptomatic of much of Africa; enormous potential, underinvested but gradually moving up investor radars.  Long blighted by an inadequate policy framework, this is rapidly changing through both internal and external forces.  Internal forces are increasing population and urbanisation, driving up demand for agricultural products.  External forces are mainly foreign investment.  This investment can take the form of buying thousands of hectres of agricultural land or simply mergers and acquistions among international manufacturers such as tobacco and beer companies or commodity dealers.

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Labour Relations 

Labour relations are a central issue for investors and the effect they have on costs often represent a swing investment decision.  The fatal shooting of over 30 workers at the platinum mine 90 km northwest of Johannesburg in August 2012 has brought to the fore the issue of labor relations in Africa as the continent is facing unprecedented levels of investment and investor interest.

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Why Africa is not Competitive

Costs, especially the cost of labour, are a major factor for companies deciding where to invest production capacity in order to maintain competitiveness.  Africa as a continent has among the world’s lowest average wage levels.  It also has abundant natural resources.  However from a labour and general cost perspective, it is extremely expensive.  The reasons why go to the heart of the reason for the continent’s fragile economic climate.
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