The Case for Investing in Africa

In this guest post, Peter Thoms, the founder of Africa Capital Group, shares his top five reasons for investing in African stock markets.

Africa may be the last great ground-floor international investment opportunity left on earth. Until just recently, however, the continent has remained beyond the consciousness of all but the most adventurous of investors. But now Africa is beginning to gain a wider audience in financial circles. Why? Because it has notched strong growth for the last decade and is likely still in the early stages of a powerful and transforming spurt of economic progress.

In this guest post, Peter Thoms, CFA, the founder of Africa Capital Group, shares his top five reasons for investing in African stock markets.

Africa may be the last great ground-floor international investment opportunity left on earth. Until just recently, however, the continent has remained beyond the consciousness of all but the most adventurous of investors. But now Africa is beginning to gain a wider audience in financial circles. Why? Because it has notched strong growth for the last decade and is likely still in the early stages of a powerful and transforming spurt of economic progress.

The mature economies of the developed world—the U.S., Europe and Japan—must contend with tepid growth, aging populations and painful fiscal retrenchment for years or even decades to come. But Africa is in precisely the opposite position. Having enacted economic and political reforms and shaken off its post-colonial torpor, Africa is on an impressive growth trajectory. The continent’s market-based ideals are solidifying, and it is simply a matter of time before its capital markets and economies become more developed, liquid and integrated with the global financial system.

Today the continent—sub-Saharan Africa in particular—features rapid growth, abundant natural resources and a large, young and increasingly educated workforce. Forward-thinking investors have the opportunity to get into Africa now, before the continent makes a one-time-in-history transformation from an impoverished agrarian subsistence economy to a modestly prosperous and more urban consumer-based economy. Nowhere is the adage “the early bird gets the worm” more applicable than in the field of investing. Whether pertaining to a company, country or continent, investors who perceive opportunity before others—and then act decisively on their perceptions—position themselves to be rewarded with higher returns for longer periods.

Africa, admittedly, continues to suffer from a serious image problem. While deserved in certain cases, the outside world’s perception of Africa as a place of poverty, hunger and incessant warfare has kept many investors away. The media in the developed world does Africa no favors by focusing intently on its problems and paying minimal attention to its positive developments. But tough image or not, Africa is moving forward. Vibrant entrepreneurship and resourcefulness are in full display in much of Africa as people seek to build better lives for themselves and their families. While this progress may not show up on your nightly newscast, strong economic growth and a lengthening track record of solid equity market returns indicate that things are turning for the better.

Photo by Evan Bench

The continent’s present image creates an opportunity for today’s smaller investor. Once the media’s focus shifts to the positive change in Africa, institutional investors seeking a durable growth opportunity will come calling and investment bargains will become scarce. Just to note: the cover of The Economist Magazine on December 3, 2011 was entitled “Africa Rising,” whereas in May 2000 the same magazine dubbed Africa “the hopeless continent.”

Our Investment Thesis

Africa is the most complex continent on earth and defies simple descriptions. It has one billion of the world’s seven billion people and 20% of the world’s land mass. Behind Asia, it is both the second largest and second most populous continent. It has 54 countries with hundreds of ethnic groups speaking more than one thousand languages. One (mostly) common theme throughout the continent, however, is that the quality of life is improving.

The following themes support our investment thesis for Africa.

  1. Africa is growing rapidly
  2. Africa has immense natural wealth
  3. Africa has favorable demographics (for investors)
  4. Technology is accelerating change in Africa
  5. Africa is joining the global financial system.

1. Africa is Growing Rapidly
Around the year 2000, after two decades of tepid to non-existent growth during the post-colonial era, Africa began to stir. For the last decade, Africa has been on a steep trajectory higher. The International Monetary Fund (IMF) estimates that Africa grew at a rate of 6% per annum over the last decade—a rate much faster than the developed world and twice as fast as Africa had been growing for the prior two decades. The IMF now forecasts Africa-wide growth of 5% for 2011 and 6% for 2012 and nine of the top fifteen fastest growing economies in the world are in sub-Saharan Africa.

To be sure, the continent is rising off a very low economic base. But this depressed starting point is an attractive attribute for early investors, as it sets Africa up for what could be years or even decades of rapid expansion. That Africa is growing off a low level is a reason for investors to be encouraged and is in fact a cornerstone of our investment thesis. Investors who focus not on the absolute level of the starting point but rather on the direction and rate of change will find that Africa scores highly on these later measures.

As African economic growth kicked into high gear a decade ago, the continent’s equity markets responded. Africa’s largest stock market, South Africa’s, rose nearly 200% from 2001 to 2010 while U.S. market was essentially flat. Our expectation that Africa will continue to generate attractive returns for investors is thus not predicated on big changes occurring. We merely expect Africa to remain on its present course.

2. Africa has Immense Natural Wealth
Africa has what the world needs. Many Africans are very poor, but the continent itself is incredibly rich in natural resources. It has huge untapped energy resources in the form of oil, natural gas and hydroelectric power. Africa also holds over half of the world’s gold reserves, 40% of the world’s platinum and 20% of the world’s uranium as well as vast deposits of diamonds, iron ore, copper, and cobalt. The true natural wealth of Africa is unknown, however, as less than half of its land has even been surveyed.

On top of its mineral and energy wealth, Africa also has a huge swath of uncultivated arable land. According to the United Nations, only about 10% of Africa’s arable land is currently being cultivated and the continent holds more than 60% of the world’s uncultivated arable land. Over the next few decades, Africa will likely transition from a net food importer to a net food exporter.

Foreign direct investment (FDI) is pouring into Africa as more developed countries—notably China—seek to gain access to Africa’s resources. In 2010 FDI exceeded $55 billion, up 500% from the level a decade earlier. FDI not only brings extra cash into Africa, but also infrastructure development. Better ports, roads, rails and telecommunications systems are sorely needed to support further growth, and FDI is helping.

3. Africa has Favorable Demographics (for investors)
While the populations of the U.S., Japan, Western Europe and China are aging rapidly, Africa’s one billion people are mostly young. In sub-Saharan Africa, up to 40% of the population is thought to be under the age of eighteen. The median age in Africa is about 20 versus 30 in Asia and 40 in Europe. Africa is the youngest continent on earth and as this big bulge of population moves into its most productive years it will create huge demand for a wide array of products. Even now companies in Africa are racing to fulfill huge unmet needs across all levels of society.

As societies become more urbanized, their productivity tends to increase. In Africa now, a marked trend of urbanization is propelling growth as new inhabitants of African cities begin to contribute to the economy. Africa’s large, inexpensive, and increasingly educated labor force is poised to make a strong contribution to the global economy.

4. Technology is Accelerating Change
Communications and computing technology is acting as an accelerant in Africa; the growth of mobile phones provides an instructive example. The GSM Association, a group of mobile phone operators, announced in November 2011 that Africa is the fastest-growing mobile phone market in the world, having increased its subscribership 20% or more in each of the last five years. African mobile subscribers are expected to reach 735 million by the end of 2012—up from basically zero a decade prior. In 2001, Nigeria, a country of 160 million, had fewer than 500,000 phone lines in the whole country. Now, eleven years later, it has more than 80 million mobile phone subscribers. Africa’s rapidly developing communications infrastructure is a boon to business, as it facilitates supply-chain management, demand forecasting and overall operating efficiency.

5. Africa is Joining the Global Financial System
Africa is beginning to integrate with the global financial system. Access for foreign investors, while still difficult, is improving. Friction costs—spreads, custody, and trading costs—are higher in Africa than in developed markets, but these costs will decrease over time as trading volumes build. Financial information about African companies is increasingly available outside of Africa as many companies offer their financial reports online and firms such as Bloomberg and ThomsonReuters begin to carry African trading data on their platforms. Global investors now have online access to corporate and government financial information that until just recently was very difficult and time-consuming to access.

For the moment, however, limited liquidity for many smaller equity issues has effectively shut out large global institutions, thus providing smaller investors a clear window of opportunity. But as more companies come to market with public offerings and liquidity deepens, institutions will begin to move into Africa. In ten years many global institutions will be in Africa in some capacity. In twenty years they will all be there.

The Practicalities of Investing in Africa

There are 29 stock exchanges in Africa that represent the equity markets of 38 countries. (Two regional exchanges, one in West Africa (BRVM) and one in Central Africa (BVMAC), serve a total of 13 countries.) With the exceptions of South Africa, Egypt and Morocco, many of Africa’s capital markets are in early stages of development and characterized by a relatively small selection of individual issues and light trading volumes. At present the market capitalization of all of the stocks markets on the continent is $1.5 trillion, about a tenth of the U.S. equity market. In coming years, we expect to see trading volumes increase as more companies come to the public markets.

Our Investment Strategy

Our Africa Opportunity strategy seeks long-term total return from both income and capital appreciation through active investments in companies that we expect to enjoy profitable and sustainable growth in Africa.

Opportunities in Africa span all economic sectors. Because most African economies are in early stages of development, many attractive investments can be found in basic consumer goods and services. We expect Africans’ disposable income to increase rapidly and therefore seek to invest in industries where that money will be spent. Personal communications, food and beverage, banks, health care and retail are all industries where we expect growing demand. As African infrastructure is being built out, there are also numerous opportunities in the agriculture, construction, telecommunications, energy and mining industries. While there are now many companies enjoying high profit margins in Africa that are suitable for investment, there is also a large list of companies that have yet to come public that will offer as much or more opportunity.

Just as with early investors Asia and Latin America, we believe that investment pioneers in Africa are likely to find the journey challenging and often unpredictable, but ultimately very rewarding in the long run.

Peter Thoms, CFA, is the founder and lead portfolio manager of Africa Capital Group, an asset manager focused on opening African markets for U.S. investors.

Africa’s 10 Most Business-Friendly Countries

The World Bank released its 2013 Doing Business report this month. The document ranks all the world’s nations on how hospitable they are to starting and running a business.

Ranking criteria include everything from construction permits to taxation to the accessibility of credit.

Let’s count down the top ten easiest African countries to do business and list some of the recent reforms they’ve undertaken that make them favorites of African entrepreneurs and CEOs.

The World Bank released its 2013 Doing Business report this week. The document ranks all the world’s nations on how hospitable they are to starting and running a business.

Ranking criteria include everything from construction permits to taxation to the accessibility of credit.

Let’s count down the top ten easiest African countries to do business and list some of the recent reforms they’ve undertaken that make them favorites of African entrepreneurs and CEOs.

10. Kenya (Global Rank #121)
  • Enhanced electronic filing systems which eased the process of paying taxes, reducing the average time required to file taxes from 393 hours to 340 hours.
  • Made contract enforcement easier by introducing a new case management system for the resolution of commercial disputes.
  • Reduced the amount of red tape involved in registering a new business. As a result, the start-up process is two days shorter than it was in 2010.
 9. Uganda (Global Rank #120)
Photo by Wayan Vota
  • Clarified mortgage rules which reduced the risks involved in lending (and borrowing) to homeowners.
  • Established a private credit bureau. The agency now maintains credit information on 3.7% of Ugandan adults from 0% just three years ago.
  • Streamlined its court system, shortening the amount of time to resolve a case by an average of 20 days since 2010.
8. Zambia (Global Rank #94)
  • Eliminated the minimum capital requirement for starting a business, encouraging potential entrepreneurs.
  • Consolidated its border post with Zimbabwe to ease the flow of goods and allowed customs declarations to be submitted online, reducing the average time to import and export goods by roughly 15% since 2010.
  • Brought its court system into the cyber-age, allowing electronic reference of cases, laws, and records.
7. Namibia (Global Rank #87)
  • Reduced the time and expense required to connect to the electrical grid. On average, it now takes 38 days. Last year it took 55.
  • Adopted new legislation that clarifies the procedures for liquidation.
  • Computerized the system for registering a new business, slashing registration times.
6. Seychelles (Global Rank #74)
  • Over the past five years, eliminated the social security tax and reduced labor and corporate income taxes. The three cuts resulted in the effective tax rate dropping from 48.4% in 2008 to 25.7% today.
5. Ghana (Global Rank #64)
  • Granted an operating license to a private credit bureau, providing credit info on nearly 6% of the adult population. The country now ranks 23rd in the world in access to credit.
  • Drastically reduced the amount of time it takes to launch a new business. It now takes just 12 days compared to 42 in 2008. Moreover, the minimum capital requirement has been lowered considerably and now equates to just 4.3% of per capita income. It was more than 20% of per capita income five years ago.
4. Botswana (Global Rank #59)
  • Upgrades at the country’s busiest border post with South Africa have slashed the length of time for import and export of goods by nearly a week.
  • Streamlined business start-up procedures; reducing the length of time to get a business rolling by over 40% (47 days since 2008).
  • Technology upgrades in the Botswana court system have sped up the resolution of commercial disputes, reducing the average court case from 987 days in 2008 to 625 days presently.
 3. Rwanda (Global Rank #52)
  • Now one of the easiest places in the world to start a business (Global Rank #8), entrepreneurs can be up and running in just three days time and registration fees are negligible.
  • A private credit bureau boasts very deep credit information on over 7% of the adult population. Consumers have the right to inspect their own credit reports.
  • Shortened the length of time required for connection to the electricity grid from 55 days in 2011 to 30 days today.
2. South Africa (Global Rank #39)
  • The best place in the world to obtain credit. Credit rating agencies have access to a wealth of data and legal protection for lender and borrower is unparalleled.
  • Instituted a customs modernization program that reduced export times from 30 days in 2008 to 16 days now and import times from 35 to 23 days.
  • Simplified the tax code to reduce tax prep times from 350 hours per year five years ago to 200 hours per in 2012. Also reduced the effective tax rate from 37.1% to 33.3%.
1. Mauritius (Global Rank #19)
  • Eased property transfers by implementing an electronic record-keeping system and by statutorily limiting the length of time it takes to receive land title. It now takes just 15 days to register property in Mauritius. Five years ago, it took 210 days.
  • Instituted a wide-ranging and deep public credit registry. Credit info is now available for the majority (56%) of the adult population.
  • Recruited more judges and added more court rooms to reduce judicial backlog, shortening the average court case by more than 100 days.
What Do You Think?

So there you have it.  Africa’s best homes for business. Do the results surprise you? Let us know why or why not in the comments!

Mind the (Bullish) Gap: Mean Reversion Likely for African Stocks

Greg Barker of the Mauritius-based Sustainable Capital has just penned another insightful article on the value of African stocks. In it, he shows how African stock markets (excluding the Johannesburg Stock Exchange) have fallen well below their normal valuation in relation to other world markets over the past four years.

Since 2009, emerging market stocks have notched a 95.2% return compared to African ex-SA stocks’ 23.9% performance. To Barker, this suggests a reversion to the mean is on its way. He believes the market performances will return to their normal parity much like a rubber band does after being stretched.

Greg Barker of the Mauritius-based Sustainable Capital has just penned another insightful article on the value of African stocks.

In it, he shows how African stock markets (excluding the Johannesburg Stock Exchange) have fallen well below their normal valuation in relation to other world markets over the past four years.

Since 2009, emerging market stocks have notched a 95.2% return compared to African ex-SA stocks’ 23.9% performance.

To Barker, this suggests a reversion to the mean is on its way. He believes the market performances will return to their normal parity much like a rubber band does after being stretched.

Photo by Buh Snarf

If they were to revert to their mean, the performance gap between emerging market and African stocks would narrow by 18%.

The chasm between South African and non-South African stocks is even wider. To return to normal averages, these stocks would need to outperform their Jo-burg listed counterparts by 400 basis points.

Mean reversion doesn’t necessarily mean African markets will post eye-popping returns. Emerging markets could see their valuations drop. But if Barker’s theory holds, there should be safety in markets like Nigeria and Kenya, if not substantial capital appreciation.

You can read the entire article here.

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Hitch Your Portfolio to Africa’s Demographic Freight Train

6 (More) Reasons to Invest in South Africa

Yesterday, Jan Schalkwijk, CFA of Africa Capital Group began to make the case for investing in South Africa. Today, he bolsters his argument with six additional reasons to be a South Africa bull.

Yesterday, Jan Schalkwijk, CFA, of Africa Capital Group began to make the case for investing in South Africa. Today, he bolsters his argument with six additional reasons to be a South Africa bull.

Why else should stock investors consider South African stocks?

1. Link Between Africa and the BRICS

South Africa is an attractive market for investors who wish to gain exposure to African growth but wish to avoid the pitfalls of less mature markets in terms of liquidity, trading costs, limited data, and transparency. African GDP is forecasted to reach $2.6 trillion by 2020, up from roughly $1.6 trillion today. South Africa is well positioned to play an integral part in this growth, with its mature and competitive industries and proximity to African markets.

Additionally, South Africa will benefit from the growth of its biggest export market: China. As such South Africa – uniquely positioned at the confluence of the “Africa” and “BRICS” themes – offers a compelling case for investors with a long-term horizon and the patience to see these opportunities materialize.

2. Unemployment Slowly Easing

The combination of low labor cost pressure and competitive sophistication has benefited South African companies on the global stage. However, the benefits to South Africa’s economy would be greater with lower unemployment and thus higher domestic consumption.

Photo by Kicki Holmen

South Africa’s unemployment rate is stuck at 25% and will require high economic growth to alleviate. Though the rate is high by global standards, the 10-year trend shows a gradual reduction in joblessness.  The pent-up economic activity that is unleashed when the unemployment number comes down, bodes well for South Africa’s economic future. Also note that the informal economy in South Africa is quite large, so labor force participation and purchasing power are likely understated as much work goes unreported.

3. Inflation Held In Check

Inflation is currently at 6%, which is close to the country’s 10-year average inflation. It has peaked twice in the last decade; once at approximately 13% in 2002 and at 14% in 2008. The 2008 peak was substantially driven by commodity price inflation. Despite a 6% rate of inflation, the rand is worth the same in dollar terms today as it was in March of 2003. On balance, however, high inflation is a negative, as it leads to uncertainty for businesses and introduces volatility in the conversion of short-term investment returns earned in local currency.

4. A Diversifying Economy

The main sectors of the South African formal economy are financial services, consumer products, and mineral resources. On the resources side, South Africa is the largest producer and exporter of gold and platinum as well as a top exporter of diamonds. Chinese, Western, and Russian companies are all vested in South Africa’s mineral wealth. If managed well, South Africa will be able to parlay this dependence into further diversifying its economy so that the resources do not become a curse but a catalyst for broad economic development.

Jan Schalkwijk, Portfolio Manager at Africa Capital Group

This is beginning to happen in the diamond industry. Diamonds are a girl’s best friend, but not always a country’s best friend. It is probably fair to say that diamonds and precious metals have been more of a curse than a blessing for Africa. Though certainly they have created wealth, the benefits have not been widespread. Now, some of that wealth might find its way into the broader economy. Recently, the Oppenheimer family of South Africa sold its 40% remaining stake in DeBeers Diamonds for $5.1 billion. Some of this wealth will likely be redeployed in consumer goods and agriculture companies, a focus of the family’s investment arms.

The reinvestment of capital gains from the diamond trade into sectors that have greater economic multipliers is a positive for (South) Africa and should provide meaningful economic impact in the short-term.

5. A Healthy Banking System

South Africa has mature risk control, foreign exchange control, and settlement systems, which has greatly aided international investment and banking. Net interest margins for the country’s four largest banks have recently been in the 3.5% to 4.5% range, nowhere near as high as what you might find in frontier African countries but healthy nonetheless.

Furthermore, loan-to-deposit ratios in the banking sector are healthy at around 90% on average for the big banks. By contrast, loan-to-deposit ratios of mature European banks are generally over 100% and US banks, not eager to lend, are currently at 80%. One might conclude that the South African banking sector is mature from an infrastructure standpoint and healthy from a financial standpoint. Coupled with the growth of financial services and the broadening reach through micro credit and mobile banking, South Africa’s financial sector would seem an attractive destination for investment dollars.

6. An Emerging Middle Class

The consumer industries comprise the third pillar of the South African economy. The thrust of this paper has been a discussion of the economic opportunities that abound in South African and the continent at large. Ultimately, these opportunities all lead to the same place: the emergence of an African middle class. Therefore, consumer companies are at the core of a successful Pan-African investment strategy.

South Africa has several publicly traded companies that are currently focused on the African consumer. Most known perhaps is Shoprite Holdings (SRHGY), a supermarket chain that operates close to 400 stores in 16 countries throughout Africa. Its economies of scale allow it to be a price leader and it has branched into value added services such as ticket sales, pharmacies, liquor stores, and financial services. Though a leader, other companies are sure to follow.

Africa’s Turn to Shine

The promise of Africa is the alignment of favorable macro opportunities that will finally make the continent an economic power in its own right and deliver prosperity to a growing share of its people in the 21st century. Much in the way that investors were rewarded for early investment in Japan in the 1960s and emerging markets in the 1980s, Africa represents an opportunity for above average returns in the decade(s) ahead.

What keeps investors from participating is very similar to what may have kept them out of Japan 50 years ago and Southeast Asia 30 years ago: lack of familiarity, misconceptions about political and economic risk, lack of rich data, and limited liquidity. Incidentally, these same factors are part of the reason excess returns can be achieved with a prudent and disciplined investment approach.

Focusing on South African companies as the gateway to investing in sub-Saharan Africa will mitigate some of the risk factors associated with Africa while still allowing for participations in the continent’s growth prospects. As the story of Africa matures, one’s Africa exposure should mature with it to include stocks listed in other countries in order to maintain exposure to above average growth.

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The Case for Investing in South Africa

South Africa may not be getting much good press of late, but Jan Schalkwijk, CFA, of San Diego-based Africa Capital Group believes its stock market remains promising. He explains why in this guest post.

South Africa offers investors frontier markets-type growth, but with more liquidity, more mature capital markets, greater data richness and greater transparency. Although markets such as Nigeria, Kenya, and Ghana hold great potential for sustained high growth, South Africa is the most mature stock market on the continent.

South Africa may not be getting much good press of late, but Jan Schalkwijk, CFA, of San Diego-based Africa Capital Group believes its stock market remains promising. He explains why in this guest post. 

South Africa offers investors frontier markets-type growth, but with more liquidity, more mature capital markets, greater data richness and greater transparency. Although markets such as Nigeria, Kenya, and Ghana hold great potential for sustained high growth, South Africa is the most mature stock market on the continent.

It comprises nearly 90% of total Sub-Saharan Africa market capitalization, and its listed companies will participate in the upside of less mature markets, making it an ideal entry point for US investors who want to allocate to Africa.

Photo by Paul Watson

Gateway to Africa

As capital controls are relaxed through tax treaties and lower barriers to direct foreign investment and profit repatriation, new capital can flow more easily into Africa. South Africa is the primary beneficiary of this development. This should greatly increase intra-African trade, which is currently only 10% of total African trade. By comparison intra-European trade as a percentage of total European trade is 60% and similar figures for the United States and Asia are 40% and 30% respectively.

As such the potential for increased trade within Africa cannot be overstated, and South Africa, as the most mature African market, is in a unique position to benefit from this increased trade. Examples of South African and multinational companies that have been using South Africa as a springboard into Africa include companies such as Massmart (MMRTY), YUM! Brands (YUM), and SABMiller (SBMRY), which can all be bought in the US OTC market.

Two-Tier Economy

Although South Africa is technically an emerging market, it is often described as a “two-tier” economy. The “first tier”- consisting of the mining, agriculture, manufacturing, financial services, and retail sectors- is competitive with mature markets in terms of efficiency and level of sophistication. The “second tier” is South Africa’s large informal economy that is best characterized as a third world economy.

Jan Schalkwijk, Portfolio Manager at Africa Capital Group

There is ample room for the first tier to grow relative to the informal economy, as South Africa continues on its development path. The informal economy can also be viewed as an untapped labor pool that can keep wage inflation at bay and ensure ample supply of labor as the first tier expands.

High Savings Rate

South Africa’s gross domestic savings in 2010/2011 amounted to 20% of GDP, which compares to 19.5% for sub-Saharan Africa as a whole and 13% in developed countries [2009]. Though not nearly as high as the 54% gross domestic savings rate in China, South Africa’s savings rate bodes well for future capital formation and economic growth.

Business Culture

South Africa compares favorably to its African peers with regards to ease of doing business, competitiveness, and level of corruption.
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One particularly hopeful data point for South Africa is the progress that has been made with regards to the ease of starting a business and the registration of property, which bodes well for future economic growth.

Progress in the Fight Against HIV/AIDS

During the last decade, South Africa’s GDP growth rate averaged 3.5%. For 2012, South African GDP growth is pegged at just under 4%, compared to 5.8% for Africa as a whole. This growth has been achieved despite having the largest HIV/AIDS population of any country in the world. In 2007, 18% of people aged 15-49 was HIV positive, vs. a sub-Saharan Africa average of 5%.

Though these numbers are bleak, the real story is the progress that is being made in combating HIV/AIDS. The rate of new infections among adults aged 15-49 declined by 35% in the period 2005-2008 compared to 2002-2005 from an annual rate of 2.0 per 100 susceptible individuals to 1.3. HIV/AIDS has a devastating effect on human productivity, therefore a reversal of fortunes for South Africa’s working age population will pay substantial economic benefits, not to mention the alleviation of human suffering that will accompany it.

Declining Crime Rate

Another receding headwind to consider is South Africa’s crime rate. The murder rate per 100,000 citizens in the 2010/2011 reporting year was 31.9, compared to 4.8 in the U.S. (a relatively violent country by Western standards). Again, as with the HIV/AIDS scenario, the absolute number does not tell the full story. In the 2003/2004 reporting year, the murder rate was 42.7 and has been steadily declining since.

One headwind that has not seen improvement, however, is income inequality. The GINI Index measures the level of income inequality within a society. South Africa’s GINI score deteriorated to 67 in 2006 versus 57.8 in 2000 (more recent data is not available). This score is high on an absolute basis and the trend is reason for concern as well. Though its effect on economic growth is not clear, it could breed social unrest which would detract from South African efforts to become a more stable, cohesive society.

Though the jury is still out on income inequality, the bigger picture in South Africa is one of receding headwinds, which bodes well for productivity growth and capital formation.

In the second part of this article, I will explain further why I believe investors should be bullish on sub-Saharan Africa’s largest economy.

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