3. The Risk Agenda: how to safely invest into Africa?

Why not invest into African markets? What are the blocking points and what should foreign investors focus on as the key risk items in managing an African portfolio?

Investing into Africa: easy sell, easy entry

At a high level, views on investing into Africa match those of other emerging regions around the world - with economic and political considerations leading the table of challenges faced by global investors every day. That this comes before market risk and regulatory frameworks is no surprise, given the significant role that economic and political factors play in determining valuations and market returns.

What is striking is that 'selling Africa' (i.e. generating investor interest) is considered to be easier than managing onshore investments - coming in as the 4th most important challenge for portfolio investors. This is particularly true for North American investors, who appear to find the Africa pitch significantly easier than their European counterparts.

And compared with other Emerging and Frontier market regions, the ease of market entry into African markets is also a stand out. Where foreign investors face highly complex entry and registration processes in other major markets (such as Brazil, India and China), the absence of this complexity in African markets is striking.

Africa's investment risks depend on where you're standing

Viewed more closely, it seems that long-established preconceptions around African investment challenges hold firm - but not with everyone.

From the outside in, managing country-risk is the predominant blocking challenge for investors who are looking at investing into Africa. Faced with significant regional diversity, the challenges of charting the political and macro-dynamics in each market are the biggest area where global investors struggle when they look at Africa for the first time.

Yet that challenge dissipates quickly once investors have begun trading in Africa - with only 12% of existing investors citing country-risk as a blocking challenge (putting it in 5th place as an obstacle). For those already invested in Africa, micro-considerations around FX management and market liquidity come to the fore, as these investors seek to realise concrete returns from the region.

That political considerations fall away so fast for those already investing only serves to further highlight the critical importance of shifting perceptions on what it means to invest in Africa today. Investor education - notably helping global investors to see past the headlines, to acknowledge their sub-conscious biases and to understand the true opportunities of the region - is clearly a critical lever in helping to facilitate new flows into the continent.

"So much of African investments hinge on FX - and if I don't believe I'll get my money back then the conversation doesn't even begin"

FX is at the heart of the issue

If there is a single, central concern shared by all profiles of Africa investor today, it is FX.

FX liquidity restrictions and currency controls were the numbers one and two blocking factors for existing investors into Africa today - highlighting the many faces of this problem.

First, perceived limitations around foreign currency repatriation can act as a blockage to any investment, "if you don't think you will see your money back then you won't invest it in the first place". As we have seen in other markets (such as China), these limitations need only be perceived in order to have a significant effect - and global investors are extremely sensitive to the slightest cases of friction in this space. Any hint of 'bad behaviour' in FX controls can not only send shockwaves through the industry, but memories of this can last.

Second, volatile and or depreciating local currencies mean that onshore investment returns can be eliminated when they are exchanged back into US dollars or Euros. If a successful onshore investment yields 10%, it can quickly be invalid if the currency has depreciated by 11% at the point of repatriation (or if the market liquidity is insufficient to absorb a major funds transfer), as is often the case.

Lastly, there is the operational process around how FX transactions. With questions in many markets around the procedures for managing failing FX trades (and limited processes for exception handing amongst many African markets), some regulated UCITS or 40 Act fund managers will likely stay away from certain markets, in the absence of operational clarity.

Africa-bound investors clearly struggle on all of these fronts today - making the funding leg exponentially more important in an African context than the corresponding security investment.

The removal of potentially challenging currency controls, building up market depth and numbers of market participants to ensure that investors have options when it comes time to divest their holdings are key future developments. Equally, the promotion of 'market making' (i.e. encouraging trading within local markets to drive up levels of activity) could also lower perceived market risk again making markets more appealing to overseas investors.

Whilst central banks play a key role in the evolution of their respective currency regimes, many of these challenges are outside of their direct control. The requirement here appears to be a market-wide effort in some markets to build a transparent and liquid FX regime.

"It's entirely up to African market authorities to decide their own fate. Are they willing to do what it takes to attract foreign investors?"

Future flows: African investments are in Africa’s hands

There is no doubt that it is in the industry's interest to focus on shaping Africa's FX markets.

Not only is it the core challenge for global investors but our survey highlights that local market reforms are the key trigger for foreign inflows across every investor segment. FX reforms demand attention but investors look set to reward change-markers who do innovate in this space.

After currency reforms, sovereign ratings clearly still matter - especially to the large-scale investors in North America, whose fixed income investments are heavily reliant on bond ratings as a leading indicator. In Europe, the sustainability messaging echoes strongly - becoming more important as investors' AUM grows.