Consumer confidence in European markets has been slipping since the start of the year as austerity programs hit home, but if investors want to find fresh and vibrant consumer markets they should perhaps look south to Africa, some experts and investors said.
A new report by the African Development Bank, released Friday, shows that the continent’s middle class, defined in local terms as those with annual income of more than $3,900, has swollen to more than 300 million in 2010, from 190 million at the turn of the century.
Sustained GDP growth, high commodity prices and increasing foreign direct investment - particularly from China, India and Brazil - have seen income levels rise and a class of consumers emerging.
This consumer class is buying more than ever, and investors could do worse than to divert their money away from moribund developed markets and into this frontier asset class, experts say.
Sales of white goods and vehicles have surged almost universally across the continent, the report said. Ghana, whose economy is forecast to grow by almost 12 percent in 2011 as revenues from its newfound oil reserves trickle down into the economy, has seen an 81 percent increase in car and motorcycle ownership since 2006, according to the ADB.
The report supports what seasoned Africa investors have been saying for some time. The continent still has some dark spots that tend to make the news, but the remainder has been on a sustained growth path for the best part of a decade. That growth in gross domestic product has translated into higher consumer spending, lifting a broad range of sectors.
“There are more households in Africa with $20,000 per year and above (in income) than there are in India,” Sven Richter, managing director of frontier markets at Renaissance Asset Management told CNBC.com. While not massive by Western standards, this is an aspirational segment that is driving growth.
“These are the ones buying more and more into consumer goods, they have more disposable income. When you look at the fastest growing consumer goods in Africa, it’s makeup, it’s yoghurt, it’s all things that are moving into the higher end,” Richter said.
Banks, More Active Than Ever
African economies’ GDP growth has been buoyed by banks that are more active than ever in consumer and small business finance, as well as by improving infrastructure, high rates of urbanization and a broad improvement in the political risk environment.
An influential 2010 McKinsey report, “Lions on the Move” calculated that Africa’s 18 largest cities will represent a consumer market of $1.3 trillion per year by 2030 and said that the rate of return on investments on the continent is higher than in any other developing region.
Investing in a continent that demonstrates enormous diversity across its 53 countries is never simple, and stock markets outside of South Africa, Egypt and the Maghreb countries are not flush with liquidity, but there are ways of accessing the markets. Internationally listed players, such as PZ Cussons or Diageo, can also provide exposure.
Private equity has also grown extensively on the continent over the past five years.
“Africa still offers plenty of scope for private equity investments,” co-CEO of Emerging Capital Partners, one of the largest players in the space, told CNBC.com, saying that the continent has “at least another decade of growth expected from consumer goods, broadband internet and financial services, which can offer top quartile returns, even when compared to developed markets.”
Where developed markets, particularly the US, continue to look shaky, Richter said that there is another very good reason to look to Africa – its low correlation with western markets.
“Look at the correlation. If you put three percent of your emerging markets portfolio in Africa, you increase your return and reduce your risk because of that low correlation,” he said.