Humans have told stories since the inception of communication. They’re inextricably linked to the evolution of humanity through their use as a means of transferring knowledge. Stories can be communicated via illustration, movement and voice. They help us to learn and understand language, culture, science, society, religion and by implication meaning. They fuel creativity as well as innovation and help us explain things we don’t understand.

Stories also create expectations. These expectations can become extremely powerful, especially if they’re linked to powerful concepts. Think about how stories fuel religion and how that links to society. Stories form the centre of our civilisation − without them there’d be no society, no science and no progress. Simply, they become part of our way of making sense of the world. This is also true in the investment world – we tend to latch onto stories to help us make sense of all the noise and uncertainty out there.

However, stories often also have a negative effect on the value of our investments. This article references Africa as an example of how stories fuel expectations, and drive up asset prices to extreme levels relative to their value. It also questions the narrative that Africa will turn out to be the investment destination superhero that saves the investment world’s long-term returns.

Africa was defined by the scramble for resources

During colonial times, Western powers viewed Africa primarily as a source of commodities in the form of labour and materials. At the Berlin Conference in 1884 and 1885, the major European powers divided Africa into arbitrary boundaries, throwing together different people − often enemies − and setting the context for future instability.

While various African countries gained their independence relatively shortly after this, they retained the colonial dominance of European languages such as English, French and Portuguese. At the same time, attention moved to the East and West, and Africa remained a dark continent in terms of investment. Capital inflows were limited largely to donations, infrastructure projects and commodity extraction.

Africa is currently a popular investment story

Now that the stories of the unlimited scope for growth in China and the ‘invulnerability’ of Western institutions − like AIG and Lehman Brothers − have faded, global interest has returned to the massively untapped African market.

Africa is an immense mass of land – the second largest continent on earth after Asia. It has a population of over 1bn people – approximately one seventh of the world’s population. It also has one of the world’s richest sources of arable land and volumes of rare and valuable commodities. This reads like a superior investment opportunity, almost without limit. Many investors talk of the continent as the superhero that will push-start the locomotive of global growth.

In these times of low growth and even lower interest rates, most investors desperately want to believe this story and will invest in anything related to it as a result. This has a massive effect on their expectations, which fuels even more stories. But what is the reality?

We journeyed around Africa to make up our own minds

During the past 12 months, two of our analysts navigated through some of the rising African countries outside South Africa.

Our analysts set out to answer three questions:

1. What is the investment climate in those countries?

Tax regulations, legislation, politics, culture and tribalism are particular to each country and investors need to understand each country’s dynamics before attempting any investment. We also found financial reporting and governance standards in some countries to be poor. However, some African firms have excellent management and country-specific expertise or sites that make it difficult for foreign firms to compete in their territory.

– Seed Company of Zimbabwe (Seed Co) has significant intellectual property specific to the region’s environment, which took decades to develop. It would be very difficult for a competitor to come in and compete.
– Safaricom has built extensive telecommunication infrastructure over the years and has excellent management.
– Athi River Mining (ARM) Cement. Similar to South Africa, limestone deposits in Kenya are concentrated. More importantly, Uganda, Rwanda and Burundi don’t have significant limestone deposits, which make owning the only significant deposits in the region extremely valuable. However, the companies with quality characteristics are most often overvalued.