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Africa Comes into View

Comparisons to China are premature, but investors find its long-term growth potential hard to ignore.

Ali Masarwah and Rob Wherry, 12/03/2014

This article originally appeared in the December/January 2015 issue of Morningstar magazine. To subscribe, please call 1-312-384-4000.  

China’s growth story has been remarkable. The country’s economy grew at a staggering 10% annualized pace for 20 years as its government conducted a massive infrastructure building campaign. Global companies built manufacturing operations in China to take advantage of a cheap, educated workforce. More than 600 million people were pulled out of poverty, creating a powerful middle class consumer block that influenced global commodities demand and bought all types of goods and services with their newfound wealth.

China today is still a force to be reckoned with, but recent economic data reveal it isn’t the roaring dragon it once was. Granted, at an estimated 7.7% GDP growth rate for 2014, it outpaces the growth rate of most developed and emerging markets, and it also remains one of the world’s largest economies. But wages have started to rise, making manufacturing more expensive compared with other emerging and developed countries. And there are concerns about the financial health of its banks and a real estate market that looks overheated. In an era of low yields, it’s no wonder investors are looking around the globe and asking: “Where’s the next China?”

Many investors point toward so-called frontier markets—regions that are at earlier stages of their development than more-mature emerging markets. Places such as Southeast Asia, Eastern Europe, and South and Central America all hold promise, but it’s Africa—home to abundant natural resources, a huge, young potential workforce, and some of the fastest growing economies—that has many investors salivating. Could Africa follow a similar trajectory to China’s over the next few decades?

In the two articles that follow this report, Morningstar’s equity analysts R.J. Hottovy and Jeffrey Stafford state their cases. For this article, we wanted to get the views of portfolio managers who run frontier market funds.

Every thing I see says Africa will see GDP growth of 5%,” says Oliver Bell, the manager of T. Rowe Price Africa & Middle East TRAMX. “At the same time, most emerging markets are moderating. That backdrop gives well-run companies a massive opportunity.”

Sizing Up the Opportunity
Demographic data make it easy to see the attraction to Africa. The population of the continent’s 54 countries, currently at 1.1 billion, will grow faster than most regions in the coming decades, according the U.N. projections ( EXHIBIT 1). Primary-school enrollment rates in sub-Saharan Africa increased to 77% in 2011, up from 58% in 1999, according to the World Bank. A large, educated workforce should attract manufacturers. As Africans’ wages increase, their spending habits will impact the demand of all kinds of goods and services.

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