The Rise of Africa… and How To Play It

The Rise of Africa… and How To Play It

By Adam J. Crawford, Analyst

Sub-Saharan Africa (SSA).

Say the words and most people think of poverty… famine… epidemics… political strife… sectarian violence. Yet, just recently, Microsoft announced a new investment on the continent, calling Africa a “game changer in the global economy.” So what gives?

Game Changer?

For starters, we concede SSA faces challenges… relatively low per-capita GDP, relatively low life expectancy, and more than its fair share of military conflict. Nevertheless, considerable progress is being made.

Politically, things have changed dramatically over the last two decades. In a recent report from financial advisory service firm KPMG titled “African Emergence—The Rise of the Phoenix,” researchers explained why…

The end of the Cold War more than two decades ago brought new freedom to Africa. People started to demand political representation and called on governments to be more transparent. Democratic features were introduced and a vibrant civil society emerged.

Influenced by this political renaissance, governments began to act more responsibly. Several ended hostilities with neighboring countries.

With political change came economic change.

Beginning in the 1990s, fledgling African democracies increasingly accommodated private enterprise by reducing trade barriers, cutting corporate taxes, and privatizing state-run industries. By the time the 2000s rolled around, these reforms started to gain traction. In 2000, GDP for all of SSA was a meager $331 billion. By 2012, it had quadrupled to $1.3 trillion.

As far as the future is concerned, with more stable political and economic environments and the unleashing of market forces, SSA will reap the benefits of two megatrends:

1) growing demand for natural resources;

2) increasing consumer spending by an expanding middle class.

Let me explain…

As the world’s population grows and per-capita consumption rises in emerging economies, the demand for natural resources will increase… and SSA has plenty of natural resources, such as gold, oil, chromium, and platinum. But as important as natural resource exports will be, they aren’t the region’s only engine for economic growth.

Consumerism is also a powerful factor, and it’s being driven by an emerging middle class. More and more SSA citizens are moving from subsistence farming to higher-paying urban jobs. In 2000, about 59 million African households were earning discretionary income; by 2020, discretionary income will be available to 128 million households.

All of this points to the expectation of continued economic growth. Economists at the International Monetary Fund estimate that by 2018, GDP for SSA will reach $1.9 trillion. That amounts to a compounded annual growth rate of 7%, which compares favorably with estimates for Latin America and developing Asia of 4.7% and 8.1% respectively.

Leapfrogging to the Tech Frontier

Microsoft is not the only big tech company betting on growth opportunities in SSA. Intel, Google, Hewlett-Packard, and IBM have also invested heavily in the region. But are these companies a little early? Won’t the benefits to tech come after the buildup of roads, power grids, and healthcare systems?

Not really.

Whereas in developed countries, high tech has been “bolted onto” existing infrastructures years after they have been created, in developing regions high tech can be integrated in as the infrastructure is constructed. For example, as the US struggles to mesh electronic health records with the healthcare system and smart-grid technology with the power grid, developing economies can build these features right into their nascent systems at the outset. In the words of John Kelly, head of research at IBM, Africa “can leapfrog straight to the tech frontier, without worrying about adapting old systems…”

In addition, the Cloud is adaptable to and quite useful in the early stages of an economy’s development. According to The Economist, “The ability to use software, computing power, and storage online ‘as a service,’ paying only for what you need and only when you need it, may put the cost of information technology within the budget of many small African businesses.”

The point is: the time for tech in SSA is now… not a decade from now. That’s why so many big tech firms are setting up shop in the region. Research firm IDC predicts that IT spending across Africa will increase from $30 billion in 2012 to $40 billion in 2016, and if telecom is included, spending will increase from $103 billion in 2012 to $130 billion by 2016.

But here’s the thing: Africa won’t significantly move the revenue needle for the global tech giants, so investors should look elsewhere for opportunities. Our advice? An African telecom.

The Gains Down in Africa

As mentioned before, over the next few years, millions of SSA households will be acquiring discretionary income for the first time. That means millions more in the region will have more money to purchase necessities, and they’ll begin to purchase things like mobile phones and mobile services.

According to GSMA, a global trade organization for mobile phone operators, there will be 250 million mobile phone connections in Africa over the next five years. That bodes well for African telecoms. But it’s a hotly contested space. So which telecom is the best bet?

We like MTN Group Limited (MTNOY). The company is on solid financial ground. It pays a nice dividend. Its network is superior to the competition’s, which is why MTNOY is the market share leader in SSA. Oh, and the stock is cheap—even after the 12% run the stock has gone on since we recommended it in the December issue of BIG TECH. If you want access to our comprehensive report on MTNOY as well as access to our other buy recommendations, which include a networking equipment provider with 90% near-term upside potential, then sign up for a risk-free trial of BIG TECH.