Five Reasons why East Africa Should be Part of Every Investment Portfolio
East Africa is one of the fastest growing regions in the world. Good economic conditions and political stability form the basis of an unprecedented success story. In this article we explain five reasons why East Africa belongs in every well-structured investment portfolio.
East Africa comprises 20 states. Among the most important are Ethiopia, Kenya, Rwanda, Tanzania and Uganda. With a total area of more than six million km², East Africa is larger than Europe. The population is somewhat smaller, at more than 300 million people. The economic growth of East Africa in 2019 was about 6% – the highest in Africa. According to the African Development Bank, East Africa will continue to be the most dynamic region on the continent.
The top reasons for investing in East Africa are:
- Peace and stability
- Big steps through “small” investments
- Risk diversification
- African Free Trade Area (AfCFTA)
- Change of mentality
Peace and Stability
Investors bet on that African region, which is most characterised by peace and stability. According to the BVMW (German Association of Small and Medium-sized Enterprises), most countries in East Africa have a low level of corruption, high political stability and are governed by the rule of law, and thus offer a safe and secure business environment.
East African Community
An important cornerstone for peace and stability was laid in 2000 with the founding of the East African Community (EAC). The partner states of the EAC jointly pursue the goal of deepening economic, political, social and cultural integration. The quality of life of the people is to be increased through security, competitiveness, value creation, trade and investment.
A pan-African guarantor of peace and stability that is also important for foreign investors is the founding of the African Union (AU), that is based on the model of the European Union. The AU pursues the goal of greater political and economic integration of the continent and gives it a single voice. The African Standby Forces provide military clout to jointly enforce peace against terrorist groups.
Large Steps Through “Small” Investments
East Africa, like the other African regions, is only at the beginning of industrialisation. It is one of the poorest regions in the world. The productivity of the people and the efficiency of the companies is comparatively low. Measured by Western standards, the infrastructure is in urgent need of improvement. In almost all sectors of the economy and public administration, potential for improvement quickly comes to mind. At this level of development, even “small” investments can achieve major efficiency gains.
Grand Ethiopian Renaissance Dam
A good example is the new Grand Ethiopian Renaissance dam. The connected hydropower plant is the largest in Africa and will reliably supply not only Ethiopia but also other countries in East Africa with electricity. It will reduce the cost of electricity and in some cases make electricity supply possible in the first place. A dam comparable to the Ethiopian project is the construction of the Julius Nyerere hydropower plant in Tanzania, which will be the fourth largest hydropower plant in Africa.
Rwanda’s Logistic System
Rwanda is land-locked, i.e. has no seaport of its own. The only possibilities for importing and exporting goods are the (expensive) airways and highways. However, the road network is of poor quality – transport times and costs are high. The completion of the railroad line between the Tanzanian city of Isaka and the Rwandan capital Kigali will lead to a high increase in efficiency here. In particular, however, Rwanda will receive a fast and inexpensive connection to the port of Dar es Salaam, which will considerably increase its international competitiveness.
A Rwandan logistics center built in 2018 is another good example of how “small” investments can increase efficiency. Thanks to the logistics center in Kigali, the average turnaround time was reduced from 10-14 days to 3 days. There are many other examples. They illustrate the enormous value-added potential that results from comparatively small investments. So East Africa is making great leaps forward.
“Don’t put all your eggs in one basket” is probably the most important rule of investment. For example, if you invest your entire assets in a single asset class or geographical region, you expose yourself to a high risk of loss. Investors use risk diversification to spread the risk of loss. Losses in one investment can be offset by gains in another.
East Africa is particularly suitable for risk diversification because it is one of the fastest growing and most stable frontier markets in the world. As a result, East Africa is better able to absorb economic shocks, like highly developed economies.
African Continental Free Trade Area (AfCFTA)
The African Free Trade Area (AfCFTA) is probably the most important African joint project. At present, intra-African customs duties are at 6.9 %. This and other trade barriers, such as different product standards, are one reason why intra-African trade currently accounts for only 17 % of total African trade. AfCFTA creates common standards and abolishes 90 % of customs duties on goods. This creates a 2.5 trillion USD sales market.
Substantial increase of intra-African trade
A significant increase in intra-African trade is expected as a result of falling costs and a corresponding increase in competitiveness – African industrialization will continue to advance. The main beneficiaries are the manufacturing industry. A significant strengthening of the middle class is also expected. East Africa will benefit particularly from AfCFTA because it already has a strong economic position.
Change of Mentality
The African continent is characterized by a donation culture that has been in place for decades. The western world has felt called to do good in a variety of projects. On the African side, however, this has led to mental dependencies that inhibit innovation and individual initiative. However, Africa is now in a state of upheaval.
The President of the East African country Rwanda, Paul Kagame, summed up the change in African mentality: “In the meantime we in Africa have understood that trade and investment, not financial aid, are the pillars of our development.”
Other African leaders also embody this change. Ghanaian President Akufo-Addo emphasized: “We can no longer base our policies on what we can get from the Western world. This has not worked in the past and will not work in the future. It is our responsibility to develop our nations independently”.
A good example of the departure from the mentality of dependence is the creation of the African free trade zone. A rather abstract example is the planned renaming of Lake Victoria in East Africa. The petition in the neighboring countries of Kenya, Tanzania and Uganda is justified by the fact that the lake is a regional cultural asset and should not bear the name of a person who was an advocate of the slave trade.
Investors who want to participate in the African upswing can choose from a variety of equity funds and ETFs. The following equity funds have a weighting of approximately 10% in Kenyan equities and thus East Africa: DWS Invest Africa LC, JPM Africa Equity and Robeco Africa Funds. The ETF DB X-Trackers MSCI EFM Africa TOP 50 Capped Index also invests in Kenya with approximately this weighting.
In addition, there are also alternative investments. For example, GreenTec Capital invests in innovative and sustainable African start-ups, including in East Africa in digital logistics solutions or innovative and sustainable feed solutions for fish. The provider MLC Properties enables investors to participate financially in real estate projects in the East African countries Rwanda and Tanzania through the limited partnership interest MLC Properties East Africa.