10 reasons why you should invest in Africa

Africa is a land of opportunities in the 21st century. Global investors should not be bogged down by the continent’s
long dark history. Africa is shining at present. They should be able to seize the portfolio of opportunities the
continent is offering. Persistent and high economic growth, the commodity price boom, macroeconomic stability,
reduction in political instability and internal strife, conducive macroeconomic policies, and deepening regional
economic integrations anchor growth and maturity of opportunities in the continent.

By Olivier Lumenganeso, economist, financial strategist

July 2010

F
or years Africa has been known as the continent with beautiful landscapes, exotic animals and rich natural
resources. As a region to invest money in, Africa was mostly seen as unexplored territory. Only in the
recent past, has the second largest continent in the world begun to move into investors focus due to its
interesting investment opportunities. Undeniably, Africa has witnessed, since the beginning of the new
millennium, significant economic growth, strongly outperforming OECD (Organization for Economic Cooperation
and Development) members, for example. This improvement is largely attributable to high commodity prices,
better economic policies and political reforms implemented by the African governments, a growing middle class
and the end of hostilities in a number of countries. It comes as no surprise that experts from the International
Monetary Fund (IMF) state that Africa is now “at its best period of sustainable development and low inflation”.

Here below we present 10 reasons why global investors should be interested to invest in the continent.

1. A continent in the move

A
frica, indeed, is a vital region of the world. With close to a billion people (15% of global world population)
and vast natural resources, the region’s opportunities and accomplishments are frequently overshadowed
by crises, conflicts, and chronic poverty. More than one in eight people on earth live in Africa. More than
half of these men, women, and children live in abject poverty. The continent attracts less than 1% of global capital
flows and accounts for less than 2% of world merchandise trade (exports and imports), 3% of world exports of
commercial services, 4% of global gross domestic production (GDP), and 5% of net capital inflows to developing
regions. As a result, Africa is not a primary destination for global capital. But without significant amounts of
capital, Africa’s development objectives will not be achieved. While these challenges are daunting, recent data
show that global capital flows into Africa can be enhanced significantly. This potential reaffirms that Africa’s
challenges do indeed have solutions.

Yes, Africa is a continent with great challenges, tremendous opportunities, and unappreciated accomplishments.
Since 1990, for example, 42 of the 48 countries in sub-Saharan Africa have held multi-party elections, and most
Africans today have the right to choose their leaders at the ballot box. But on the other hand, Africa has fallen
behind the rest of the developing world in many dimensions of development. Life expectancy has decreased with
the rise of the HIV/AIDS pandemic. The average African is poorer today than he or she was two decades ago,
and the number of people living in poverty has increased steadily during the past 20 years (although the share of
Africa’s population living in poverty has remained largely unchanged). These broad trends, nevertheless, mask
significant differences across the continent.

Nevertheless, while some countries remain mired in conflict and economic stagnation, nearly a dozen have
achieved economic growth rates of 5% or more in the last ten years. An increasing number of these countries
have successful, profitable, and export-oriented private investments. These successful investments suggest that
Africa provides many opportunities for external capital to generate attractive returns and for some African
countries to emerge as examples-both political and economic-for the rest of the continent to follow. Despite this
important progress in some parts of Africa, the continent is still perceived as risky, and that perception in many
cases is higher than warranted. As a result, even those African countries that have significantly improved their
investment climates experience difficulty in attracting substantial new investment.

10 reasons why you should invest in Africa 1

 2. Better political landscape and business climate

T
he political landscape of Africa has also undergone significant positive and lasting changes over the past 15
years. Several African countries halted their deadly hostilities, creating the political stability necessary to
restart economic growth. Governments moved from armed military structure to pluralistic political system. In
1985, 37 out of the 53 countries in Africa had undemocratic and authoritarian governments. At present only 11
countries still have governments that came into office without due process. Since 1990, for example, 42 of the 48
countries in sub-Saharan Africa have held multi-party elections, and most Africans today have the right to choose
their leaders at the ballot box.

Doing business in Africa was once perceived as a difficult and complex undertaking. The reasons: the numerous
processes associated with conducting business, combined with a fragile investment climate and inadequate
infrastructure. But with political reform, it is reasonable to expect economic freedom and growth. With fewer
conflicts, more democratic elections, and economic growth rates that gradually have begun to compete with those
of other developing regions, Africa is proving itself again a continent of positive change. Together, all the
structural changes helped fuel an African productivity revolution by helping companies to achieve greater
economies of scale, increase investment, and become more competitive. We believe the journey to prosperity in
Africa has begun. It is unfortunate that the focus on backsliding and setbacks in a few countries overwhelms the
encouraging picture in the rest of the continent.

3. Solid and buoyant economies

A
frica is the least developed continent in the world. The combined GDP of the continent in 2009 was USD
1.6 trillion, USD 2.2 trillion based on Purchasing Power Parity (PPP). This compares with the combined
World GDP of USD 58.1 trillion (PPP) and that of China USD 4.9 trillion (PPP). The continent has shown
remarkable economic growth since 2001 with continental annual average economic growth in excess of 5%,
among the fastest-growing parts of the world between 2001 and 2008, with average growth of 5.6% a year. While
the commodity boom played a role, stable macroeconomic conditions coupled with structural reforms, including
the privatization of state-owned enterprises and lowered barriers to competition and foreign investment,
underpinned the impressive growth. It was accompanied by large amounts of foreign direct investment (which
more than tripled during these years), including inflows from emerging Asia (China and India or CHINDIA here
below) and from the Gulf countries. In sum, foreign investment has diversified in recent years as a number of
African governments undertook structural reforms to make their economies more attractive.

10 reasons why you should invest in Africa 2

Even though Africa was hit by the recent global financial and economic crisis, and growth slowed sharply in 2009,
to 2.5%, the continent avoided the recession. The impact of the crisis varied across regions and countries, though
on the whole the decline in growth was less severe than expected, allowing for a faster recovery. In sharp
contrast to other parts of the continent, southern Africa has been directly affected by the global crisis because its
resource-rich countries are dependent on exports. The group of middle-income countries in North Africa, despite
their close integration with the European Union, fared much better, partly because of their less open capital
accounts and more diversified economies. The IMF is forecasting that Africa will achieve 6% of real GDP growth
in 2011. Growth at this pace qualifies Africa as a fast-growth emerging market and reflects a steady improvement
over the last 10 years. This improvement, again, is the result of a number of factors, including a massive
reduction in debt, falling interest rates and falling inflation. Less easy to quantify but no less important, most
African countries are now stable and their people are beginning to experience personal and economic freedom.

Yes, the key reasons behind this growth performance surge included government action to end armed conflicts,
improve macroeconomic conditions, and undertake microeconomic reforms to create a better business climate.
African governments increasingly adopted policies to energize markets. They privatized state-owned enterprises,
increased the openness of trade, lowered corporate taxes, strengthened regulatory and legal systems, and
provided critical physical and social infrastructure. Next, Africa’s economies grew healthier as governments
reduced the average inflation rate from 25% in the 1980s to 6% after 2000. They trimmed their foreign debt by
one-quarter and shrunk their budget deficits by two-thirds. Compared with the 1970s, many governments in Africa
have shown a more prudent fiscal approach to the commodity price boom in recent years. In sum, the African
fiscal position has improved from a deficit of 2.7% of GDP at the start of the decade to a 1.9% surplus in 2008.

10 reasons why you should invest in Africa 3

Most African countries have seen a significant reduction in their debt burdens partly due to the improved
macroeconomic situation, above all in the resource-rich countries. At the same time, many of the poorest
countries in Africa benefited significantly from the Heavily Indebted Poor Countries (HIPC) and the Multilateral
Debt Relief Initiative projects, two important international initiatives that aimed at reducing the debt burden of the
world’s poorest countries. The regional current account position has also shown considerable improvement over
the last seven years. Over the 1980s and 1990s, Africa averaged a deficit of 2.6% of GDP. The annual flow of
foreign direct investment (FDI) into Africa, including from within Africa itself, in 2008 increased to USD 88 billion
(30% of GDP), from USD 10 billion in 2000 (10% of GDP), resulting in an increase of FDI stock in the region to
USD 511 billion. This increased FDI accounted for the bulk of new African capital inflows, which grew rapidly from
2000 to 2008. North Africa attracted 27% of the FDI to the region in 2008, compared with 36% in 2007; and the
47 countries of sub-Saharan Africa attracted 73% in 2008, up from 64% in 2007. In 2006, total gross private flows
amounted to about USD 45 billion, almost 6% of GDP, compared with about USD 9 billion in 2000. In aggregate
terms, total African foreign exchange reserves increased from less than USD 50 billion in the mid-1990s to USD
100 billion in 2002, before rising exponentially to more than USD 300 billion by end-2006.

While Africa’s increased economic momentum is widely recognized, its sources and likely staying power are less
understood. Further investigations show that resources accounted for only about a third of the newfound growth1.
Telecommunications, banking, and retailing are flourishing. Construction is booming. Private-investment inflows
are surging. Yet the commodity boom explains only part of Africa’s broader growth story. African economies are
becoming more and more diversified. Indeed, In the shift from agrarian to urban economies, multiple sectors
contribute to growth. The share of GDP contributed by agriculture and natural resources shrinks with the
expansion of the manufacturing and service sectors, which create jobs and lift incomes, raising domestic
demand. On average, each 15% increase in manufacturing and services as a portion of GDP is associated with a
doubling of income per capita.

Most African countries today fall into one of four broad clusters: diversified economies, oil exporters, transition
economies, or pre-transition economies. Although the countries within each segment differ in many ways, their
economic structures share broad similarities. The continent’s four most advanced economies (Egypt, Morocco,
South Africa, and Tunisia) are already broadly diversified. Manufacturing and services together total 8% of their
combined GDP. Domestic services, such as construction, banking, telecom, and retailing, have accounted for
more than 70% of their growth since 2000. Domestic consumption is the largest contributor to growth in these
countries.

1
Lions on the move: The progress and potential of African economies, the McKinsey Global Institute (July 2010).

10 reasons why you should invest in Africa 4

Africa’s oil and gas exporters have the continent’s highest GDP per capita but also the least diversified
economies. This group (Algeria, Angola, Chad, Congo, Equatorial Guinea, Gabon, Libya, and Nigeria) comprises
both countries that have exported oil for many years and some relative newcomers. Economic growth in these
countries remains closely linked to oil and gas prices. Manufacturing and services account for just one-third of
GDP, less than half their share in the diversified economies. The oil exporters generally have strong growth
prospects if they can use petroleum wealth to finance the broader development of their economies. Nigeria
provides an example of an African oil exporter that has begun the transition to a more diversified economy.
Natural resources (95% of foreign currency income and 80% of the federal budget) accounted for just 35% of
Nigeria’s growth since 2000, and manufacturing and services are growing rapidly. Banking and telecom, in
particular, are expanding thanks to a series of economic reforms.

Africa’s transition economies (Cameroon, Ghana, Kenya, Mozambique, Senegal, Tanzania, Uganda, and
Zambia) have lower GDP per capita than the countries in the first two groups but have begun the process of
diversifying their sources of growth. These countries are diverse: some depend heavily on one commodity, such
as copper in Zambia or aluminum in Mozambique. Others, like Kenya and Uganda, are already more diversified.

The economies in the pre-transition segment (the Democratic Republic of the Congo, Ethiopia, Mali, and Sierra
Leone) are still very poor, with GDP per capita of just USD 353, one-tenth that of the diversified countries.
Although the individual circumstances of the pre-transition economies differ greatly, their common problem is a
lack of the basics, such as strong, stable governments and other public institutions, good macroeconomic
conditions, and sustainable agricultural development. The key challenges for this group will include maintaining
the peace, upholding the rule of law, getting the economic fundamentals right, and creating a more predictable
business environment.

4. Favorable commodity cycle

T
he demand for natural resources is linked to the various stages of economic development. As an economy
moves from an agricultural base towards industrialization, the call for raw materials as inputs into
manufacturing, construction and infrastructure make greater demands on energy and industrial raw material
commodities. Since the second World War, commodity prices have experienced three major price booms, in
1951-53, then again in 1973-75, and finally in 2003-08. Each period has seen a sustained increase in the
international prices of hard and soft commodities generated by demand and supply fundamentals in the global
economy. In 2003-08, it was world’s emerging economies’ (CHINDIA, mainly) resource intensive growth that
substantially increased demand. The steady rise in prices for most of the 2000s has been termed as a Super
cycle, fuelled by CHINDIA’s domestic infrastructure and manufacturing growth.

10 reasons why you should invest in Africa 5

This is a powerful stimulant to a continent which is full of natural resources. Indeed, Africa contains 90% of the
world’s platinum reserves, close to 80% of its cocoa and diamonds, 60% of its phosphate, 50% of its bauxite and
chromium reserves, 30% of its gold, 20% of its titanium, close to 15% of its oil and natural gas, as well as
abundant quantities of many other hard and soft commodities, according to estimates. Not that Africa is just about
resources. Growing wealth is also stimulating the rapid development of the consumer and service sectors and
certain key areas of manufacturing.

5. Domestic demand as the key driver …

Y
es, Africa benefited greatly from the surge in global commodity prices over the past decade. But Africa’s
economic potential extends well beyond commodity exporting. Natural resources account for close to the
quarter of the continent’s GDP growth. The rest comes from other sectors, including wholesale and retail,
transportation, telecommunications, and manufacturing. Domestic demand represents today 150% of the
continent’s global growth (20% in 2000, essentially from government spending). Private consumption accounts
now for 60% of total growth, while its contribution was negative during the 1990s. Investment in fixed assets is set
to reach close to 22%, an all-time high contribution to growth for the region, but a very low size with regard to
other comparable regions.

So, Africa’s long-term growth also increasingly reflects interrelated social and demographic trends that are
creating new engines of domestic growth. Among these, we have the rise of a middle-class African consumer
and augmenting urbanization needs. And as more Africans are moving from farm work to urban jobs and see
their income rising at a level above which they can spend roughly a large part of their income on items other than
food only. According to estimates, 85 million African households earned more than USD 5’000 or more in 2008.
The numbers of households with discretionary income is projected to rise by 50% over the next ten years,
reaching 128 million. By 2030, the continent’s top cities could have a sending power of USD 1.3 trillion.

Africa is already one of the world’s most dynamic consumer markets. Since the beginning of the millennium,
African consumption has grown as significantly as in Brazil and India. The continent’s households spent USD 860
billion in 2008. Africa’s consumer will spend about USD 1.4 trillion in 2020, according to estimates. Spending
patterns will shift as more as more households gain discretionary spending power, and consumer business
opportunities will also grow brining consumer’s market to USD 1.8 trillion.

10 reasons why you should invest in Africa 6

Meanwhile, labor force is expanding as well. The continent has more than 500 million (half of its global
population) of working age. If Africa can provide young its young people with adequate education and skill tools,
this large force could become an impressive task force and a significant engine of global consumption. For
example, after declining through the 1980s and 1990s, the continent’s productivity started growing and even
accelerated reached 2.7% by 2008. Thus, Africa’s growth acceleration has started to improve conditions for its
people. More, as a result of all these dynamics, a effervescent African business sector is emerging. The continent
has today close to 2’000 publicly listed companies, some of them (about 5%) with revenues greater than USD 1
billion.

6. … fuelled by impressive demographic dynamics

A
frica’s population is rising rapidly and tops a billion. According to the United Nations, it will most likely
double its population by 2050. In the coming decades, indeed, one of Africa’s most powerful offerings may
be its growing population of young people. Africa's population has rapidly increased over the last 40 years
(221 million in 1950 to 1 billion in 2009), and consequently it is relatively young. In some African states half or
more of the population is under 25 years of age. It is estimated that by 2050, almost 20% of the world’s
population will live in 4 Africa, up from 7% in 1950. By 2050, young people 15 to 25 years of age will account for
one person in five in sub-Saharan Africa. By the same token, the region is rapidly urbanizing. In 1980, just 28% of
African lived in cities. Today, about 40% do, a portion close to China’s and larger India’s. The United Nations
projects that the proportion of sub-Saharan Africa’s people living in urban areas will nearly double between 2005
and 2050, from 35% (300 million) to more than 67% (1 billion). Urbanization and the growing young population
will have significant implications for productivity, growth, and demand. Sub-Saharan Africa has the potential to
become an increasingly important resource for labor-intensive industries if it continues to invest in skills and
infrastructure and to reform its business environment, especially as wages are expected to rise in Asia.

Africa is urbanizing fast, a change that is predictable and beneficial. But this augmenting urbanization needs and
consumption appetite create challenges for the continent, mainly in building infrastructures. This insufficient
infrastructure and poor institutions, most new settlements are informal and not covered by basic services. This
situation has severe consequences for health, incomes, and market integration.

10 reasons why you should invest in Africa 7

 Source: the World Bank (2010): Africa’s infrastructure.

Many necessary investments are beyond the limited fiscal and financial base of African cities. According to World
Bank estimations, African deficits in terms of investment in infrastructure is huge, and to reach the Millennium
Development Goals (MDGs), all parties (governments, the private sector, international financing institutions,
country partners ) should be strongly committed in closing the funding gap between actual investment spending
(USD 45 billion) and estimated financing really needed (USD 93 billion) forth both rehabilitation of existing assets
and building of new capacities.

Source: the World Bank (2010): Africa’s infrastructure.

About 40% of the total spending needs are associated with power, reflecting Africa’s particularly large deficits.
About one third of the power investment needs are associated with multipurpose water storage for hydropower
and water resource management. After power, water supply and sanitation and then transport are the most
significant items.

Source: the World Bank (2010): Africa’s infrastructure.

10 reasons why you should invest in Africa 8

On just about every measure of infrastructure coverage, African countries lag behind their peers in the developing
world. The growth effects of further improving Africa’s infrastructure would be even greater. Simulations suggest
that if all African countries were to catch up with its peers, per capita growth in the region could increase by 2.2%
points. So, infrastructure has been responsible for a bulk of Africa’s recent improved growth performance and has
the potential to contribute even more in the future. For strategic investors, all the needs and expecting spending
for the maintenance and rehabilitation of existing assets and for the building of new capacities offer a portfolio of
investment opportunities in physical and social infrastructures such as transportation (roads, tunnels, bridges,
airports, ships, railways, and other forms of transportation), electricity (generation and coverage), water supply
and sanitation, information and communication technology (ICT), education, hospitals, public housing, land and
area development, prisons, even defense (equipment maintenance and installation, supply chain integration and
operational support, depot maintenance, and real estate management).

7. Africa as the last frontier market

F
rontier markets are the "little guys" among emerging markets. Their equity markets tend to be too small or
too illiquid to be included in the broader emerging markets indices. And, although they typically share the
attractive long-term growth prospects of mainstream emerging markets, they tend also still to be at a very
early stage of development. In this sense, they consider themselves as well-positioned to develop into a new
wave of emerging markets in the coming years. So, while the frontier markets of the 1980s may have been
countries like Brazil, India and China, today's frontier markets comprise countries like Croatia, Egypt, Kazakhstan,
Kenya, Libya, Mauritius, Morocco, Nigeria, Saudi Arabia, Sri Lanka and Vietnam. These markets can be seen as
a new generation of emerging markets.

Perhaps the strongest evidence of Africa's efforts to become a full participant in the global economy is the wave
of stock markets that have been set up across the continent over the past two decades. The unfolding wave of its
stock exchanges across the continent has led some investors to dub the African economies as the next
generation of emerging markets. This development is significant not only for its signaling effect to the international
investment community, but also because foreign equity capital flowing to Africa allows African economies to
achieve investment rates greater than their domestic (still low) savings rates. In this context, it is interesting to
note that equity flows to Africa doubled in the years between 2004 and 2008 to USD 7 billion per year,
representing a further symbol of growing international confidence in the continent's growth potential. And although
most markets are still small, African exchanges are growing.

According to Levine (1997)2, over the past two decades, stock market liquidity has been a catalyst for long-run
growth in developing countries. Without a liquid stock market, he further argues, many profitable long-term
investments would not be undertaken because savers would be reluctant to tie up their investments for long
periods of time. In contrast, a liquid equity market allows savers to sell their shares easily, thereby permitting
firms to raise equity capital on favorable terms. By facilitating longer-term, more profitable investments, a liquid
market improves the allocation of capital and enhances prospects for long-term economic growth. Recent
empirical studies also found that countries with relatively liquid stock markets grew much faster over the next
twenty years than countries with illiquid markets, even after adjusting for differences in other factors that influence
growth, such as education levels, inflation rates, and openness to trade. The studies also indicate that, in
promoting economic growth, a liquid stock market complements a strong banking system, suggesting that banks
and stock markets provide different package of financial services to the economy. Financial markets are,
therefore, the life blood of the economy.

In recognition of the importance of stock markets in economic development, several African countries launched
stock exchanges during the past two decades. At present more than 50% of the 54 African countries operate
stock exchanges. Although starting from a low base, recent studies show that the region's stock markets have
begun to help finance the growth of African companies but must develop further to offer broader economic
benefits. This rise of some African countries to emerging market status gives them a tremendous economic

2
Levine, R. (1997): Stock markets, economic development and capital control liberalization. Perspective, Investment
Company Institute, Occasional papers, Volume 3, No.5.

10 reasons why you should invest in Africa 9

opportunity. Theoretically, indeed, rapid expansion of stock exchanges in the continent contributed to economic
development in various ways. These are, among others, facilitating the privatization process, diversifying the
financial services, facilitating long term capital mobilization, provision of alternative investment opportunities,
attracting foreign capital inflows and serving as a signal of overall macroeconomic performance. Evidence is
already mounting that financial flows are being translated into growth in financial intermediation in these
countries. To help ensure sustained growth, the countries should continue to ensure that macroeconomic policy
and capital account prudential policies are tailored to avoid the traps of volatile short-term flows, and that
supervision promotes financial sector stability and effective intermediation.

This development of stock markets in the continent is expected to boost domestic savings and increase the
quantity and quality of investment. Critics, however, argue that a stock market might not perform efficiently in
developing countries and that it may not be feasible for all African countries to promote stock markets, given the
huge costs and the poor financial structures. So far, corporate financing patterns in some African countries
suggest that stock markets are an important source of finance. For example, the stock market in Ghana financed
about 12% of total asset growth of listed companies between 1995 and 2002, 16% in South Africa between 1996
and 2000, and 8% in Zimbabwe between 1994 and 1999, according to the IMF. In all these countries, the stock
markets were the single most important source of long-term external finance.

The combined number of listed companies for all stock exchanges in the continent grew from about 1786 in 2005
to over 2000 in 2008. At present, over 50% of the 54 countries in the continent have formed securities
exchanges. In an effort to promote regional cooperation, individual African securities exchanges established an
African Securities Exchange Association (ASEA) in 1993. The 29 member stock exchanges of ASEA belong to 26
countries. Some stock exchanges in the continent are not members of the ASEA. These include countries such
as Gabon with recent stock exchange start ups. African stock exchanges are also striving to promote sub regional
integration. For instance, 8 countries in West African sub region which belong to the West African Economic and
Monetary Union (WAEMU) integrated their stock exchanges into a single BRVM regional stock exchange. The
BRVM was established in 1998 and is based in Abidjan, the capital of Côte d'Ivoire. The BRVM is the first
regional stock exchange of its kind in the world. The WAMU is characterized by the recognition of a common
monetary unit, the Franc of the African Financial Community (CFA Franc), which is issued by the Central Bank of
West African States (BCEAO). WAMU comprises: Benin, Burkina Faso, Guinea Bissau, Côte d'Ivoire, Mali, Niger,
Senegal and Togo. These countries have a combined population of over 74 million and a combined GDP of over
USD48 billion in 2009. The economic power house in the union is Côte d'Ivoire, with 45% of the GDP coming
from this country.

8. High risk, low liquidity, compensated by portfolio diversification potential

M
ost African markets exhibit all the classical frontier stock market characteristics: high risk, high return, low
liquidity and the risk of violent currency movements. However, these risks are compensated by excess
returns relative to typical emerging market indices and diversification potential feature.

There has been a considerable development in the African securities markets since the early 1990s. Prior to
1989, there were only 8 stock markets in the entire continent of which 3 were in North Africa and 5 in sub
Saharan Africa. Today there are close to thirty stock exchanges in the continent. In spite, indeed, of their rapid
developments, many stock exchanges in the continent are still not mature. Except the three biggest stock
exchanges in the continent, i.e. South Africa, Egypt and Nigeria, most exchanges are characterized by low
market capitalization, few listed companies, low liquidity, few stocks and information and disclosure deficiencies,
among others.

There has also been a significant growth in market capitalization and the number of listed companies. The market
capitalization for the entire continent was only about USD 569 billion in mid 2005. However, the market
capitalization of JSE of South Africa, the biggest stock exchange in the continent, alone grew to USD 886 billion
during the fourth quarter of 2007. The market capitalization of Egyptian stock exchange, the second largest in the
continent, and the Nigerian stock exchange, the third largest, was respectively USD 150 billion in February 2008
and USD 82 billion at the end of 2007.

10 reasons why you should invest in Africa 10

10 reasons why you should invest in Africa 11
Together the three biggest stock exchanges in the continent have a combined market capitalization of over USD
1.118 trillion in early 2008. African equity market capitalization was about 20% of GDP in 2005, comparable to the
level reached by ASEAN (Association of South East Asian Nations) countries in the late 1980s. By 2007, Africa's
equity market capitalization had surged to over 60% of GDP. Excluding the markets of South Africa, the average
capitalization of about 27% of GDP is lower than in most emerging markets. Malaysia, for example, has a
capitalization ratio (market capitalization relative to GDP) of about 160%. Moreover, the region's markets are
immature: indicators of stock market development show that they are small and have few listed companies.
Market liquidity is also low, with turnover ratio of less than 1% in Swaziland compared with about 29% in Mexico.
The three biggest stock exchanges account for more than 90% of the market capitalization in the continent. The
market capitalization is 100% of GDP in Egypt in 2008 while it is slightly less than 50% of GDP in South Africa.

Also, Africa's domestic bond markets are attracting interest in a way not seen in first-generation emerging
markets. Between 1992 and 2002, the capitalization of African stock markets more than doubled from USD 113
billion to USD 245 billion. Trading of domestic and foreign debt in the international markets has accelerated
rapidly. Emerging Markets Traders Association data show that trading in Africa's debt markets (excluding South
Africa) more than tripled in 2007, reaching about USD12 billion.

10 reasons why you should invest in Africa 12

 Africa All-share (ex
JSE All- share FTSE All- share NIKKEI -225 S&P 500 MSCI World
S. Africa)

Africa All-share (ex

1.00
S. Africa)

JSE All- share 0.03 1.00

FTSE All- share -0.04 0.46 1.00

NIKKEI -225 0.04 0.30 0.21 1.00

S&P 500 -0.05 0.24 0.41 0.12 1.00

MSCI World -0.01 0.41 0.66 0.34 0.89 1.00

So, African equity markets have the potential to deliver strong long-term returns, given their large populations,
their technological catch-up potential and the fact that their consumer markets are still in their infancy. We believe
investments in those markets should be allocated to a satellite part of a diversified portfolio only, and investors
should be willing and able to tolerate higher market volatility and temporary distortions than is typical in
established markets. Indeed, the correlation between African equity markets and other regions of the world is low
and in some cases negative, offering opportunities for reducing portfolio risk and volatility.

9. Africa equity markets’ performance confirms the bright outlook

E
quity returns in Africa are not an aberration, but reflect positive fundamental changes in the
macroeconomics of the region. As mentioned previously, during the 1990s, indeed, a lot of African
countries restructured their economies and adopted liberal market reforms reducing their budget deficits,
implementing sound money policies, bringing down inflation, freeing their exchanges rates, etc. These policies
are beginning to bear fruit. For the first time since the early 1980s, real GDP growth is now exceeding population
growth by a reasonable margin and living standards are rising though gradually, budget deficits have been
brought under control, currency exchange rates have become more stable, and corporate profits and return on
investments are relatively high.

There are close to 30 stock exchanges in the region and since 1995, there has been at least one African equity
market among the top 10 best performing markets in the world. For example, in 2003 Ghana posted gains of
144% in US dollar terms. Joining Ghana in the top ten stock markets was Kenya (up 112%) and Uganda (up
140%). In 2002, it was Botswana (up 33%) while in 2001; it was Nigeria (up 24%), Botswana (up 28%) and
Malawi (up 25%). In 2009, there was a marked divergence between the performance of the larger emerging
markets (up 74.5%) and the G7 markets (up 24.2%) relative to frontier markets (up 7%) and Africa (down 6.9%),
making 2009 the second consecutive year in which African equities have underperformed most other regions of
the world.

From its trough of February 2, 2009 (at a score of 126.74), to its peak of April 26, 2010 (at a level of 299.84), the
S&P Africa 40 Index, more than doubled, reporting a daily continuous average rate of return of 0.29%.
Annualized, this represents a 100% performance, while the S&P Africa Frontiers, the S&P BRIC 40 and the S&P
Emerging Markets BMI returned 26%, 76%, and 81%, respectively, during the same period 3. During the first half
of this year, as of June 30, 2010, the S&P Africa Frontiers returned 7.2% versus -0.7%, -9.4%, and -6.8% for the

3
The S&P Africa 40 index provides exposure to 40 of the largest, most liquid companies that operate purely in Africa. Stocks
must meet minimum criteria for market capitalization (USD 100 million) and liquidity (three-month average daily value traded
of USD 1 million). The S&P Africa Frontier is a benchmark index for the Sub Saharan African continent, and includes stocks
from the frontier African countries of Botswana, Code d’Ivoire, Ghana, Kenya, Mauritius, Namibia, and Nigeria. The S&P
BRIC 40 index is designed to offer exposure to four emerging markets: Brazil, Russia, India, and China. The S&P Emerging
BMI (Broad Market Index) captures all companies domiciled in the emerging markets with a float-adjusted market
capitalization of at least USD 100 million and a minimum annual trading liquidity of USD 50 million.

10 reasons why you should invest in Africa 13

S&P Africa 40, the S&P BRIC 40 and the S&P Emerging Markets BMI, respectively4. In terms of continuous
average rate of return, this corresponds to an annualized performance of 14.9% for the S&P Africa Frontiers
versus -1.5%, -17.9%, and -13.1% for the S&P Africa 40, the S&P BRIC 40 and the S&P Emerging Markets BMI,
respectively.

We still believe that Africa is likely to offer sanctuary when investors finally begin to focus on the fundamental
performance of companies and economies. African growth has never been predicated only on exports and has
remained robust despite the global slowdown. Turning to fundamentals, corporate earnings remain strong with
average earnings per share growth: 32% for 2008, 8% for 2009, and forecast 22% for 2010. African equities trade
on a P/E 2010 of 10.1x relative to 17x for emerging markets and 20x for advanced economies. The valuation
differential between Africa and other emerging markets is not a reflection of any fundamental difference in
economic outlook. So, the investment case for Africa remains intact and today the markets offer rare
opportunities to buy stocks with double digit earnings growth and yet trading on single digit P/E ratings.

10. Plethora of investment opportunities

S
o, how and where to invest? Africa’s economic growth is creating substantial new business opportunities
that multinational companies often overlook. New projections from the McKinsey Global Institute (MGI)
show at least four categories that together could be worth USD 2.6 trillion in annual revenues by 2020
(exhibit)5. MGI reviews the prospects of the continent’s consumer-facing sectors (retailing, telecommunications,
and banking, among others), agriculture, natural resources, and infrastructure. Consumer sectors, the largest
opportunity, are already growing two to three times as fast as those in the OECD countries. This growth will
create more consumer markets large enough to attract multinational companies.

Africa’s agriculture holds enormous potential for companies across the value chain. With 60% of the world’s
uncultivated arable land and low crop yields, Africa is ripe for a “green revolution” like those that transformed
agriculture in Asia and Brazil. MGI estimates that the continent’s agricultural output could increase from USD 280
billion a year today to USD 500 billion by 2020 and as much as USD 880 billion by 2030. Further growth in
Africa’s resource sectors is likely. MGI analysis suggests that the continent’s production of oil, gas, and most
minerals, measured by volumes, may continue to expand steadily by 2 to 4% a year. At current prices, this growth
would raise the value of resources produced in Africa from USD 430 billion annually now to USD 540 billion by
2020.

4
Globally, due to concerns about the pace of global growth and risk on European sovereign debts, equity markets
underperformed during the first half of 2010. The S&P 500 returned a -7.7% for the US; the Nikkei 225, a -7.8% for Japan;
the MSCI Emerging Markets, a -7.4% for global emerging equities; the MSCI World, a -10.6% for global equities; and the DJ
Stoxx 600, a -18.2% for Europe. For the BRIC, only India did well with 1.4% of performance for the BSE Sensex. Russia
outperformed with -6.7% for the RT SI$; China, -7.9% with the HSML 100; while the Brazilian Bovespa returned a -14.4%.
5 McKinsey Global institute (2010) : Sizing Africa’s business opportunities.

10 reasons why you should invest in Africa 14

Finally, MGI sees large opportunities for companies that help build Africa’s infrastructure. Currently, African
governments and private sources combined are investing about USD 45 billion a year to do so. The continent,
however, still faces huge unmet needs, which will require at least an additional USD 48 billion a year in spending.
This goal could be met through a combination of higher outlays by African governments, private companies, and
non-OECD investors, along with regulatory reforms to boost operational efficiency. Some two-thirds of this total
relates to capital expenditure, and the remaining one-third to operation and maintenance requirements. Meeting
Africa’s infrastructure needs calls for a very substantial program of infrastructure investment and maintenance.
This also offers a portfolio of investment opportunities in: (i) developing an additional 7,000 megawatts a year of
new power generation capacity (about half through multipurpose water storage schemes) ; (ii) enabling regional
power trade by laying 22,000 megawatts of cross-border transmission lines; (iii) raising household electrification
rates by 10% points; (iv) interconnecting capitals, ports, border crossings, and secondary cities with a good
quality road network; (v) more than doubling irrigated areas; (vi) meeting MDGs for water supply and sanitation;
(vii) providing global systems mobile voice signal and public access broadband to 100% of the population.

Conclusion

frica offers among the world's best investment prospects as emerging markets grow ever more important.

A Although Africa did not escape the global slowdown completely, growth still remained positive over the
crisis, weathering the storm thanks to a strong economic and financial performance in the years leading up
to the global crisis. The continent withstood the financial crisis better than many predicted, and the region's
economic growth is forecast at 4.75% in 2010. Next year, half of the world's 10 fastest growing economies
are expected to be in Africa, and it is now attracting more than just the most intrepid investors. Now, it is poised to
return to its previous high growth trajectory, a result of such structural drivers as the reinvestment of commodity
gains and demographic trends, focused upon a young population and a growing middle class.

Also, the continent is now increasingly being seen as the final frontier in global trade as foreign countries look to
Africa to sustain growth going forward. Portfolio investors are also beginning to recognize the opportunities as
well. Although at an early stage of their development, most African equity markets are well regulated and in
recent years trading volumes have grown significantly. Before the crisis there were probably 40 people or groups
establishing Africa funds. In 3 to 4 years, you will have 100 Africa funds and the biggest one will likely worth more
than USD 20 billion. Fund tracker EPFR6 reports 43 consecutive weeks of net inflows to Africa equities funds,
reaching USD 484 million in the first half of 2010, nearly double those to India over the same period. However, it
remains the case that many African markets are dominated by domestic institutions and individuals, are not well
researched by international investors, and are not widely held internationally. Lastly, the African markets show a
low correlation amongst each other, but also compared to world markets, offering then great opportunities of
portfolio diversification. Looking back at the last ten years shows the relatively weak link between the continent’s
stock price movements and the ones of major global stock exchanges and other emerging markets.

Nonetheless, quickening economic growth cannot obscure the continent’s significant problems - among them,
high levels of poverty, political instability, poor education, excessive government bureaucracy, and corruption. In
addition, Africans must improve both the quality and accessibility of health care and address the sustainability of
resources. But in this year 2010, as the continent organized the FIFA world cup for the first time in South Africa,
the eyes of the world is back on Africa, and we believe investors should position themselves accordingly. We
strongly believe that now is an excellent time to invest in Africa.

6
www.emergingportfolio.com

10 reasons why you should invest in Africa 15

List of African stock exchanges

# Exchange Location Founded Listings Link

West Africa
1 Bourse Régionale des Valeurs Mobilières Abidjan 1998 39 BRVM
Algeria
2 Bourse des Valeurs Mobilieres d'Alger Algiers 1997 7 SGBV
Botswana
3 Botswana Stock Exchange Gaborone 1989 44 BSE
Cameroon
4 Douala Stock Exchange Douala 2001 2 DSX
Cape Verde
5 Bolsa de Valores de Cabo Verde Mindelo 2005 4 BVC
Egypt
6 Cairo & Alexandria Stock Exchange Cairo, Alexandria 1883 378 CASE
Ghana
7 Ghana Stock Exchange Accra 1990 28 GSE
Kenya
8 Nairobi Stock Exchange Nairobi 1954 48 NSE
Libya
9 Libyan Stock Exchange T ripoli 2007 7 LSM
Malawi
10 Malawi Stock Exchange Blantyre 1995 8 MSE
Mauritius
11 T he Stock Exchange of Mauritius Port Louis 1988 40 SEM
Morocco
12 Casablanca Stock Exchange Casablanca 1929 81 Casa SE
Mozambique
13 Maputo Stock Exchange Maputo 1999 3 BVM
Namibia
14 Namibia Stock Exchange Windhoek 1992 43 NSX
Nigeria
15 Abuja Securities and Commodities Exchange Abuja 2001 ASCE
16 Nigerian Stock Exchange Lagos 1960 223 NSE
Rwanda
17 Rwanda Over T he Counter Exchange Kigali 2008 2 BBC Article
South Africa
18 AltX Johannesburg 2003 51 ALT X
19 Bond Exchange of South Africa Johannesburg 1989 ~400 BESA
20 JSE Limited Johannesburg 1887 472 JSE
21 T he South African Futures Exchange Johannesburg 1990 SAFEX
Sudan
22 Khartoum Stock Exchange Khartoum 1994 41 KSE
Swaziland
23 Swaziland Stock Exchange Mbabane 1990 10 SSX
Tanzania
24 Dar es Salaam Stock Exchange Dar es Salaam 1998 11 DSE
Tunisia
25 Bourse de T unis T unis 1969 56 BVMT
Uganda
26 Uganda Securities Exchange Kampala 1997 14 USE
Zambia
27 Agricultural Commodities Exchange of Zambia Lusaka ZACA
28 Lusaka Stock Exchange Lusaka 1994 16 LuSE
Zimbabwe
29 Zimbabwe Stock Exchange Harare 1993 81 ZSE
Source: African Stock Exchanges Association, and Mbendi.com.

10 reasons why you should invest in Africa 16