Investor perceptions in Africa: starting an argument
by Jolyon Ford at Oxford Analytica
Do many existing or potential investors in London and similar settings unwittingly misconceive relative business risks in Africa?
I ask this question conscious that authors should avoid picking arguments with an editor — even on a site called ‘African Arguments’ and even on a topic as tricky and open to varying opinions as investing in Africa.
The previous blog-post was placed by this site’s editor, and concerned the Ernst and Young ‘Africa Attractiveness Survey’. The survey noted shifting perceptions towards risk in Africa, generally in favour of the continent. Happily, I do not have to argue with this blog’s editor in order to offer a simple proposition about patterns in the way analysts tend to approach the continent’s diverse economies. (This is to some extent a supplement of an earlier post on political risk perceptions in sub-Saharan Africa).
The size of South Africa’s economy is such that when the IMF last week revised downwards its outlook for average 2012 GDP growth across the continent, it cited sluggish SA growth as a major factor in that calculation. Now, external investor sentiment about the country tends to be disproportionately negative relative to other African economies.
Part of this reflects the fact that SA is a more mature destination in which it is harder to find cheap, less well-understood assets than in many other emerging Africa settings. However, I would suggest (or argue…) that part of the reason for London’s investment community being relatively bearish on SA and bullish on other destinations is an unwitting bias against markets about which we have relatively good information. In this sense, SA is to some extent damned by the very reason that its economic and political features are relatively easy to grasp and track. It may have all sorts of noisy, exhausting and multi-faceted policy and political arguments, and who really knows where it is all going, but what one sees is largely what one gets.
The point is that because investors know SA well — and can fairly readily see the problems, bottlenecks, risks and issues affecting it — they may unconsciously tend to exaggerate these relative to other settings about which data is less easily available, is certainly less reliable, and where risks are more amorphous. The result of this might be systematic analytical bias that over time becomes self-reinforcing. Since editors like analogies, think of a man who exaggerates both the attractive qualities of a woman whom he hardly knows and the foibles of one he knows well, neglecting the factual basis for either judgment or sentiment.
Making such an argument does not necessarily betray its sponsor’s ingrained or blind love for SA (that is, a biased approach that it is simply a ‘better’ place to invest than Mali or Malawi, Burkina Faso or Benin). It is just a reminder that wherever we have more information on a risk we may perversely tend to exaggerate the scale of it, compared to places about which less is written and understood.
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