Serious Money:The new millennium has proved daunting so far for the current generation of stock investors. The search for higher returns in the face of low yields and expensive valuations saw investors champion the prospects of the emerging markets of eastern Europe, Far East Asia and Latin America, writes Charlie Fell.
That enthusiasm however contributed to rising correlations among stock market returns from East to West and with it a reduction in the benefits of international diversification.
Entrepreneurial thinking is never deterred for long and improved economic performance and low correlations have propelled sub-Saharan Africa into the investment spotlight. Africa is now considered by many to be the new emerging markets investment frontier, but is the fanfare really deserved?
The region is currently enjoying its best period of sustained economic expansion since independence and not before time. Fifty years ago, just three countries - Ethiopia, Liberia and South Africa - were independent states, but within a decade, the shackles of colonialism had been removed throughout the region.
Robust growth in per capita incomes followed independence and reached almost 5 per cent by the end of the 1960s. Unfortunately, progress ground to a halt in the mid-1970s and the continent endured an extended period of decline until growth resumed a decade ago.
The economic decline from the 1970s onwards, combined with high birth rates to depress incomes even further, helps to explain the predicament in which most African countries find themselves today - low per capita income levels and extreme poverty.
The growth rate in GDP has averaged more than 6.5 per cent annually in recent years and economic success has extended beyond resource-rich countries that have benefited from high commodity prices. The recent record has seen international agencies and investors alike champion the notion that the sub-Sahara is on the road to economic convergence with the developing markets of Asia and Latin America.
Unfortunately, such arguments tend to gloss over or ignore the structural impediments to growth that are all too apparent.
Sub-Saharan Africa suffers numerous disadvantages that ensure a challenge to the low- cost economies is, if ever, a far- off aspiration. The business climate is extremely poor. The region is not only remote in respect of international trade, but roughly one-third of the continent's countries are land- locked. Additional transport costs mean exports cannot compete on the world's stage.
Sub-par infrastructure, excessive regulation and security costs undermine competitiveness even further.
The facts speak for themselves. Firstly, infrastructure is decidedly poor, particularly in the provision of power. Electricity generation is dismal and power cuts are common. Indeed, output loss arising from power cuts amounts to 9 per cent of total business costs in Kenya as compared with just 2 per cent in China.
Secondly, rules and regulations are excessive. Senior management spends almost 15 per cent of its time dealing with such issues, seven percentage points above the share of time devoted by the Chinese. Finally, the cost of crime, security and unofficial payments to get things done are 10 per cent or more in Kenya, while the figures from China are negligible.
The notion that a competitive business sector can be built under such conditions is naive.
Social indicators paint a similar picture. Age-dependency has long been an issue in Africa following the high fertility rates of the 1960s and 1970s. Just as demographic transition seemed to be at hand, the region has been devastated by HIV/Aids, which has brought death to the working-age population and ensures that dependency ratios remain high. Arbitrary borders put in place before independence, low population densities and the polarisation of society raises the all-too- common spectre of civil war.
Africa is being championed as a new frontier for astute investors. Global emerging market funds are deploying as much as 10 per cent of their portfolios to the continent on the heels of hedge funds and private equity. The investment opportunities have expanded considerably as the number of companies quoted on sub- Saharan exchanges has risen from fewer than 70 in 2000 to more than 500 recently.
Should you and your money blaze the trail in Africa? Statistical evidence suggests that there is no reason to believe that Africa has turned the corner and recent violence in Kenya should be enough reason for most to stay away.
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