The challenges of investing in African countries and sectors
Given that capital markets are still in their infancy in Africa, it is not easy to make investment decisions and take positions in these markets. The investment process can be lengthy and difficult due to the lack of reliable and actionable data. Furthermore, on most African stock exchanges it is nearly impossible to short stocks, which limits investors’ ability to express negative views and improve pricing through arbitrage. In addition to lack of data and trading restrictions, investors also face low liquidity and market depth. Trading volume in most frontier stock markets is still relatively low and trading costs are high, which further dis- incentivizes trading. For example, a good day on the Nairobi Stock Exchange is trading value that exceeds $10 million. By comparison, average daily trade value for Apple (NASDAQ:AAPL) amounts to $4 billion.
Today, frontier market investors rely on a variety of data to help with picking the right countries, companies and industries to invest in. Macro data on African countries is available via organizations such as the World Bank, the IMF, and the IFC, as well as from data providers such as Bloomberg and Reuters. Even though macro data provides insights into the economic health of frontier markets, it does not do a good job at capturing idiosyncratic risks and opportunities that are intra-country or industry specific. Consumer spending makes up roughly two thirds  of GDP in Africa but there is a lack of good data that allows investors to gauge consumer confidence and spending attitudes when it comes to the regional and metro level in frontier markets in Africa.
There has been a lot of hype about Africa’s economic ascendance over the past 10 years as GDP estimates were far exceeding developed markets growth estimates. Unfortunately, these rosy numbers were mostly driven by external factors such as high commodity prices and foreign direct investments. The fact that some economies were not well-diversified meant that when commodity prices dropped, economies took a turn for the worse.
Most importantly, how capable governments are of implementing effective economic policies and how confident people are that things are getting better on a national and personal level, are critical factors not captured by global macro estimates. Without this data, it is more difficult for businesses and investors to make capital allocation decisions and for governments to improve their policies in response to measurable feedback.
Global consulting firms have also started to pay attention to Africa and are providing reports on markets and opportunities on the continent. These reports are released once every 2 to 3 years and provide a snapshot that may not be current and does not capture shifts in economic activity at the time of publication. Similar to the aforementioned public and commercial data providers, consulting firms provide high level assessments of consumer trends and business opportunities. The data is capturing some bottom-up business intelligence, but the low frequency and lag of reporting diminishes the value of these reports to investors. They fail to capture the latest trends and actionable ground-level data, considering Africa’s rapid pace of change.
Trudi Makhaya is CEO of Makhaya Advisory, a research, advisory and stakeholder engagement firm. She advises KASI Insight on data products such as the KIC score, Africa's first monthly consumer confidence index.