Are investor perceptions about African markets in tune with reality?

Nigeria, Kenya, Egypt and, surprisingly, Zimbabwe have been selected as the African markets that will offer the best investment returns over the next three years, according to a report by the Economist Intelligence Unit (EIU) for Invest AD. South Africa was not included in the report due to its more advanced stage of development.

Lagos, Nigeria. While the West African country has huge investment potential, investors need strong nerves.

To produce the report, the EIU conducted a global survey of 158 institutional investors. The respondents range from a variety of financial firms and were split roughly evenly between North America, Europe, Asia-Pacific, and the Middle East and Africa.

The report says that investors are beginning to differentiate between African countries, rather than viewing the entire continent as one market.

The authors also warn of potential gaps between investor sentiment and market reality, in terms of both downside risks and missed opportunities.

Nigeria – many opportunities, but strong nerves required

When asked to select up to five African countries (out of a total of 30) with the best investment potential, more than half of the respondents selected Nigeria.

“Why are investors so bullish [about Nigeria]? And more importantly, are they right?” asks the report.

It is suggested that investors are attracted to Nigeria’s large population (158 million), its oil reserves as well as recent banking sector reforms.

“All this fuels Africa’s second largest economy (after South Africa), with average real GDP growth of over 7% for nearly a decade now. This has clearly been boosted by demand for oil, but other sectors are also developing. Agriculture and services together contribute just as much to GDP as the oil-dominated industrial sector. Meanwhile, consumer prospects are huge, and most companies expanding into West Africa see Nigeria as the gateway to the region,” says the report.

Despite Nigeria’s significant potential, investors need nerves of steel. “There is good reason for caution. Corruption is endemic, bureaucracy is slow and crime rates are high. Ethnic and religious conflict leads to sporadic violence and uncertainty over Nigeria’s stable democratic future. Democracy remains fragile, despite a largely successful election in April. Infrastructure spending is increasing rapidly, but much existing infrastructure is creaking, particularly in power generation (there are widespread shortages) and transport (of which there is not much). Nigerian businesses also have to cope with an inconsistent regulatory environment, restrictive import regulations, inadequate access to capital and a relatively weak judiciary. The country is ranked 137th out of 183 in the latest edition of the World Bank’s Doing Business report.”

Kenya – don’t ignore its neighbours

Kenya was selected as the second most attractive country, with 48% of investors thinking the East African country would offer good returns. The report, however, says that investors might miss an opportunity by only focusing on Kenya, while ignoring its East African Community (EAC) neighbours – Burundi, Rwanda, Tanzania and Uganda.

“Of these countries, Kenya receives the most investor attention. But sentiment is less bullish on its neighbours, which could be a significant missed opportunity. Uganda, for example, averaged GDP growth of 6.9% per year between 1990 and 2009. Rwanda and Tanzania have also expanded rapidly since the early 2000s (7.7% per year in Rwanda, 6.8% in Tanzania). In fact, since 2005, these three EAC countries have been among the fastest growing economies in the world, with annual average growth rates of nearly 8%.”

Respondents were asked to select up to five African markets they think offer the best prospects overall for investment returns over the next three years?
Countries% of respondents
Côte d'Ivoire3
Equatorial Guinea2
Burkina Faso1