- - Sunday, August 10, 2014

If you like legends, perhaps you already follow Baron Rothschild and search for bargains across the sorely challenged African continent as blood literally runs through too many streets.

Leaving aside the dread implications for the world should medical authorities fail to quell the virulent Ebola outbreak, how should grounded, informed and more cautious investors evaluate financial opportunities in Africa?

The investment case for Africa

The Obama administration accomplished much in gathering an unprecedented number of African leaders in Washington, D.C., last week to promote closer cooperation on many levels between the U.S. and the fractured continent.

That said, pageants and platitudes seldom end up producing compelling, risk-adjusted financial returns for investors — this should be clear looking inside America at the ongoing bloodbath in Detroit and with General Motors. It is even clearer considering any investment outside our country, especially in Africa.

There certainly are gems lurking in Africa, and not just the kind that adorn jewelry, so it makes sense to prospect there but also to tread carefully while doing so. Investing capital in any foreign nation is mostly about getting your money back inside our own borders and not simply about potential in local and export-driven growth.

So, even in the most afflicted African nations, some projects will actually end up making sense to those who concentrate upon numbers alone and ignore humanitarian considerations.

Looking beneath the surface

History from 1999 through 2012 (the most recent year for which comparable data is available) broadly supports the high-level growth case in Africa: Growth there significantly exceeded growth in America.

Gross domestic product (one standard estimate of economic output) increased a cumulative 81 percent in Africa during this period, measured in constant dollars, versus just 28 percent inside America.

On a per-worker basis, GDP growth was also faster in Africa (27 percent) than it was in America (16 percent), and the same is even more true about GDP growth on a per capita basis, which was 32 percent in Africa versus just 14 percent in the U.S.

In theory, a representative African project might hold better growth prospects, if historical trends continue, than a comparable American project. However, prudent investors need to examine local conditions within African nations quite carefully as there are important differences.

Risks posed by Islamism in Africa

Abundant evidence in Iraq, Syria and Egypt suggests clearly that adherents of radical forms of Muslim theology are, to put it mildly, prejudiced against “nonbelievers.” Therefore, you should think carefully about the prospects that radicals may succeed in gaining control over countries where you may deploy investment capital.

According to estimates contained in the online version of the U.S. Central Intelligence Agency World Factbook, 45 percent of the African population is concentrated inside nations that are now majority Muslim — 503 million people out of some 1.1 billion, as of July 2014. Five of these states are Nigeria, Egypt, Algeria, Sudan and Libya, each with troubles of its own, that together house 345 million residents.

The next group, states where the Muslim population is estimated now to be between 10 percent and 49 percent of the total, houses a further 40 percent of the African population, or 448 million. Three of these states continue to confront grave challenges arising because radical Islam continues to spread: Ethiopia (97 million people), Tanzania (50 million) and Kenya (45 million).

The balance of African nations (those where the Muslim population is lower than 10 percent) are just 17 in number and have an aggregate population of only 168 million people, or 15 percent of Africa’s total. The largest of these, South Africa, has a 48 million-strong population, but that is expected to decline, undercutting a high-level growth case.

Before you send hard-earned dollars outside America to anywhere, including Africa, make sure you understand all the risks.

Charles Ortel serves as managing director of Newport Value Partners (NewportValue.com), which provides economic research to executives and to investment firms.



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