Beyond Emerging Markets: Frontier Opportunity in Africa with Richard Rikoski, PhD

Uncover the promising realm of frontier markets in our latest podcast episode! As traditional investment avenues become saturated, Africa begins to shine as a viable option for investors looking for growth and opportunities. This month’s Financial Perspectives episode reveals how demographic shifts, economic growth, and political reforms create an environment ripe for investment in various sectors. 

Hear from Rick Rikoski, Chief Economist at Democracy Investments and CEO and Chief Scientist of Hadal, as he highlights the significant demographic shifts occurring across the continent, notably the soaring population of Nigeria, which has nearly tripled within the last few decades. As we look to the future, Africa is projected to grow by an astounding 2.4 billion people by 2100, making it a focal point for investors aiming to tap into a burgeoning consumer base. This demographic change is essential as it indicates a rising demand for goods, services, and investment in infrastructure.

The podcast also emphasizes the expansion of financial markets and highlights how nations like China are playing an influential role through initiatives like the Belt and Road Initiative. By investing in African infrastructure and financial systems, they're shaping the business landscape and creating pathways for international trade. The conversation navigates through the fabric of African economies, touching on the historical context of economic activity, often driven by resource extraction, and the evolving landscape that is shifting toward a diverse array of industries. 

Listeners will gain valuable insights into how global dynamics are shifting towards Africa, emphasizing the necessity for market reforms and infrastructure improvements to facilitate a more favorable investment climate. Join us during this episode, as we explore whether the future of global investment lies in the frontier markets of Africa.

If you'd like to learn more about the show, have a topic or speaker to suggest, or would like to leave us a comment, email podcast@cfa-sf.org.


This podcast is produced by CFA Society San Francisco, a not-for-profit professional association, providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website or connect with us on LinkedIn.

The information contained in this podcast does not constitute financial or investment advice. Please consult your own financial advisor for information concerning your specific situation.

Chapters

• 0:00 Introduction to Frontier Markets and Africa
• 20:00 Growth Trends and Economic Landscape of Africa
• 40:00 The Future: Opportunities and Challenges Ahead

Transcript

Lindsey Helman: 0:05

Hello and welcome to Financial Perspectives, a CFA Society San Francisco podcast where we interview and discuss trends with leaders from across the investment and finance industry. This month, our host, Tanya Suba-Tang, membership Director with CFA Society San Francisco, had the pleasure of speaking with Rick Rikoski, chief Economist at Democracy Investments. Listen in as they explore the growth potential of frontier markets in Africa.

Tanya Suba-Tang: 0:40

Rick, good morning. Thank you so much for joining me today. How are you?

Rick Rikoski, PhD: 0:43

Doing Great Thanks for having me.

Tanya Suba-Tang: 0:45

So I'm so excited to have a conversation with you. You and I are going to be talking a little bit about frontier markets and I'm sure a lot of people heard of emerging markets, and when they hear emerging markets they hear India or China, but today we're going to be talking about frontier markets. First, let's frame this okay. Why frontier markets? And, specifically when we talk frontier markets, why Africa?

Rick Rikoski, PhD: 1:10

Okay, well, first of all, the number that jumps out to me most impressively is simply the rapid growth of Nigeria. Nigeria was maybe 90 million people in the 90s. Today it's 225 million people. They just passed Brazil to become the sixth largest country on Earth. And if you look at population growth between now and 2100, the United States is expected to grow by 150 million people, india by 250 million people, africa by 2.4 billion people, and the entire rest of the world is net zero. So the demographic trends point towards Africa. On top of that, the world is evolving.

Rick Rikoski, PhD: 1:45

The G7, classically, were the developed countries, the BRICS were the emerging markets, and then, aside from the BRICS, you also had sort of sanctioned markets that are unreachable, like, right now, the Moscow Stock Exchange, the Tehran Stock Exchange.

Rick Rikoski, PhD: 1:58

But the BRICS are evolving and expanding. They've turned into a bigger coalition, trying to pull in other countries that might potentially be sanctioned, such as they pulled in Iran, egypt, ethiopia, indonesia, and so this is this massive group that's expanding and at the same time, you see countries like China, mexico and Russia all reaching the middle income trap. They all have about a $12,000 per capita GDP and although we historically create jobs by creating new industries and then shedding our old, lower paying industries to countries like China. China is now doing the same thing and beginning to outsource, mexico is beginning to outsource, et cetera. But Mexico can outsource to Latin America, china can outsource to Southeast Asia, the Middle Eastern countries can outsource the surrounding Middle Eastern countries, but those are smaller countries and they don't have the economies of scale. When you're outsourcing, it's not 1.5 billion people with common laws, so everyone sort of has this incentive to go where the people are, where the countries are big, where the languages are repeated and the legal systems are repeated, and that suggests that all roads eventually lead to Africa.

Tanya Suba-Tang: 3:06

Several African countries with developing financial markets are attracting institutional investors, so promising to become part of a second generation of emerging market countries. Can you give our listeners some foundation? Can you share with us what Africa's financial situation was like, maybe 15 to 20 years ago?

Rick Rikoski, PhD: 3:25

Yes, so Africa is, and the Middle East, because they all kind of tend to get lumped together, especially around Egypt. 20 years ago most of the investment was in a democratic economy. The average dollar was in a democracy, at least in terms of publicly traded investments, and that meant South Africa or Israel. And for the most part this was in that intermediate time after the end of the Cold War, the beginning of the war on terror, and African markets were kind of really resource extraction driven. At the same time you saw, you know, the inklings of political reform. This was around the time that Nigeria passed a constitutional amendment creating a democratically elected leader rather than just having a dictator, and Nigeria promptly went and reelected an old dictator and he tried to make himself dictator for life and Condoleezza Rice went in and pretty much talked him out of it and George Bush came in with an assist, and so there was a lot of guidance from the US as well in this era towards political and market reform. But most of the economic activity big picture was still South Africa-centric and mining-centric.

Tanya Suba-Tang: 4:32

So fast forward to the last 10 years. What opportunities do you see there and what are peaking in financial investors' interests?

Rick Rikoski, PhD: 4:40

So, first of all, china has pursued the Belt and Road Initiative and they've expanded out towards African markets. We've seen China Development Bank going into Africa, making infrastructure investments combined with loans. Those loans often are supposed to be repaid in terms of resources which are sold to China at essentially below market prices. This ensures the supply chain for China. So we've seen quite a bit of that. We've also seen significant booming populations.

Rick Rikoski, PhD: 5:10

Some of the countries in Africa. Their population growth rates are greater than the United States GDP growth rate. Your GDP growth rate is really the sum of your per capita GDP growth rate and your population growth rate. Some of these African countries, like the Democratic Republic of the Congo, if they have no increase in per capita GDP, their population growth rate still exceeds our GDP growth rate. They're growing like crazy. I was just looking at the numbers for Zambia, which is the most, I think, underlooked country out there. In 2015, I believe, their population was 14 million people and they're projected to hit 150 million, I think, by 2100. It's staggering the growth rates for some of these countries. So Japan recently fell out of the top 10 countries by population. Ethiopia is about to pass Japan in population. Egypt is right up there with about 110 million people. The Democratic Republic is, I think, behind Egypt, but going to pass them quickly. You've got Nigeria's huge, uganda, kenya, ethiopia and Egypt, democratic Republic of the Congo, tanzania and Zambia. All of those countries will be well in excess of 100 million people by the end of the century. So I think that what you're going to see is that we're going to go into these countries and we're going to start outsourcing disproportionately to them, especially because some of these countries have GDPs below $1,000 per capita in some cases.

Rick Rikoski, PhD: 6:32

The flip side is, I don't think that we're going to invest in all of them, and it's for several different reasons. First of all, the French-speaking countries, historically, are a mess. I don't know why, but France did not do a period. If you pull up a list of the French-speaking countries and you pull up a list of the English-speaking countries, then you cross-compare that with democracy index. It's completely different. On the English-speaking side, the countries where you're seeing your genocides and your atrocities they speak French. So I think that the investment patterns we see will, I believe, flow towards the English-speaking countries. That's not to say that that's going to guarantee investor returns. As we've seen with the G7 versus the BRICS, the G7 has had a lower GDP growth rate over the last 10, 15 years than the BRICS, but they've had higher investment returns. Right, gdp growth does not guarantee investment returns, because corruption has a cost, and that's important, but I still think there's going to be a bias in favor of the English-speaking countries.

Rick Rikoski, PhD: 7:30

The other big thing, though, to watch out for in Africa and these frontier markets is that they need to reform their markets. Their markets have very high holding costs in some situations. I believe Nigeria has an 85 basis point annual holding charge for when you buy stocks on their stock exchange. What does that mean? It means if you want to get a 10% return on an investment, they have to sell it to you at a discount in order for you to still get the same return. So they're getting 8.5% less money when they go to market to do a capital raise, which, inherently, is going to slow their economic growth.

Rick Rikoski, PhD: 8:06

But stocks no one really talks about this. With bonds, everyone says, hey, the value of a bond is tied to interest rates and when interest rates get cut, your bond's value is going to increase. Well, oddly enough, with these markets with high holding costs, if you buy a stock in Africa and all they do is reduce the holding costs for the exchange, you should immediately see capital appreciation. So that itself is a peculiar arbitrage opportunity. But in general, I think that we're going to see investment flows driven by basically just population and based on outsourcing from the emerging economies that are trying to get better jobs for their people and are shedding the older jobs that don't pay as well.

Tanya Suba-Tang: 8:46

So what do you see? Limiting Africa investment.

Rick Rikoski, PhD: 8:49

Well, first of all there's the asset charge problem. There's also a transportation problem. When we talk about rail, for instance, you talk about how far apart the railroad tracks are. Africa is not uniform on that, and very often they made very closely spaced rails simply to reduce the amount of wood you needed to put in a railroad track system. That's being reformed, so the rail system is improving, but you still can't get out of Africa by rail.

Rick Rikoski, PhD: 9:14

The most peculiar thing is that maybe it's not peculiar, but Israel shut off all rail traffic in and out of the country in 1948. So ignoring the Suez Canal for a second, basically, historically, there was an overland connection between Egypt and Iraq. Essentially, it's only 650 miles from the Nile to the Euphrates and I think it's like 800 miles from Cairo to Baghdad, and if there was rail connecting those two cities, you can imagine that that would be very good for commerce. But despite all the investment that the Chinese have made in Africa, there's no way over land to take material from Africa back to China, so it all has to be done by ship, and we know how to do this. This isn't really surprising, right?

Rick Rikoski, PhD: 9:55

I think the Chinese will adequately build out their fleet, but it's still going to be a limit on African commerce, north African commerce, middle Eastern commerce, because there's not going to be necessarily great infrastructure, at least initially, for exchange, and the other side of it is that there will probably be a lot of build-out in the Persian Gulf. The Russians have been working with the Iranians to put in what they call, I believe, the North-South Corridor, connecting Moscow to the Persian Gulf by rail, and that allows actually Moscow to then goes Moscow to the Persian Gulf, then by sea to Mumbai. Well, by the same token, if you bring ships in from Africa, it will release cargo into Central Asia, and I think that that's a very, very likely outcome. Otherwise, you know, to get to Central Asia for trade it's a complicated route. So I think you're going to see more and more sea lanes and new ports, not only in Africa but in the surrounding area, taking advantage of that moving cargo.

Tanya Suba-Tang: 10:51

So before I let you go and we kind of wrap up our conversation, I would love to get your insights on what can we expect regarding opportunities in Africa within the next 15 to 20 years.

Rick Rikoski, PhD: 11:01

Well, I think that the opportunities are, first of all, the people will probably be the most valuable asset. The education profile is changing. The technology profiles are changing. For instance, we just saw it's kind of a sad story but Russia poaching high school girls, pretending that they were going to have job training experiences and then sending them off to Russia to build drones for the war in Ukraine. But they found them to be a good workforce right. So on some level that's a really twisted endorsement, but you're seeing this evolving educational system, you're seeing evolving tech spheres, you're seeing startup hubs. These are all really, really promising developments.

Rick Rikoski, PhD: 11:39

At the same time, in terms of investment opportunities, I always go back to the California gold rush, and the one company everyone forgets from the California gold rush is Levi's. Sometimes the money is not made in mining gold, it's making pants for miners. And if you look at Africa, you look at their infrastructure situation. You look at some of these countries. The ratio of GDP to kilowatt hours of electricity is such that if you can give them an extra kilowatt hour of electricity, it bumps their GDP up by like $25, right? Clearly, they're going to need a lot of electricity, a lot of electrical infrastructure, a lot of road infrastructure, rail infrastructure and, yes, china is investing in that, partly Historically, we've done that through USAID.

Rick Rikoski, PhD: 12:20

I don't know if that's going to continue, right, but those opportunities and monetizing that kind of stuff, because, while you may not be able to pick which sector ultimately is going to persevere, if someone's starting, let's say, a credit card company in Africa, well, people are going to need credit cards, they're going to need banking. There's so many of these things that we take for granted in our own sphere that will be duplicated over there. So I think those are tremendous opportunities, and that's in addition to things like will people be taking advantage of solar power opportunities in the Sahara and feeding Europe? So I would bet on the underlying infrastructure that everybody's going to need, so you don't really have to pick a winner.

Tanya Suba-Tang: 13:00

Well, Rick, thank you so much for sharing your insight. I know our viewers probably got a lot of takeaways from that and I really appreciate your time today.

Rick Rikoski, PhD: 13:09

Thanks for having me.

Lindsey Helman: 13:21

Thank you to this month's guest, Rick Rikoski, for sharing his insights into Africa's economic landscape and trends shaping frontier markets. Join us next time for another Financial Perspectives episode airing on the last Tuesday of the month.

Lindsey Helman: 13:31

Want to receive a shout out in the next episode or share your thoughts? Send in a message to the show through the link at the top of each episode description, or email us podcast@cfa-sf. org. We love hearing from our listeners and look forward to learning what you thought of this episode or any topics that you'd like for us to cover next. Thank you for being a dedicated listener.

Lindsey Helman: 13:57

This podcast is produced by CFA Society San Francisco, a not-for-profit professional association providing professional learning and career resources to over 13,000 investment industry professionals worldwide. To learn more about CFA Society San Francisco, visit our website at cfa-sf. org or connect with us on LinkedIn.