Since the beginning of the millennium, trade between Africa and China has expanded nearly seventeen-fold to $135bn, and trade with India six-fold to $55bn. Trade among African countries has doubled since 1990 and there is still huge potential, with intra-regional trade accounting for just 12% of the continent's total exports and imports. In the Republic of South Africa, economic growth was constrained due to its system of apartheid, introduced in 1948, and the consequential international sanctions encouraging divestment – first advocated in the 1960s and taking hold widely in the 1980s. The election in 1994 of Nelson Mandela, the president of the African National Congress, to head South Africa's first multiethnic government was the dawn of a new era – with the country transitioning swiftly from an insular economy to a global trading nation. Cross-border investment grew rapidly – inbound from international institutions and outbound by pension funds, life insurers and collective investment schemes.

International institutional investors are already waking up to the potential across the African continent. In April 2015, the $180bn New York State Common Retirement Fund announced plans to invest as much as 3% of its assets in Africa over the next five years to diversify its portfolio and boost returns. This funding is likely to go to private equity and venture capital firms, along with real estate and new infrastructure projects such as power plants, according to Chief Investment Officer Vicki Fuller, with priority given to local asset managers. For infrastructure projects, the pension plan may team up with sovereign wealth funds and other pension funds.

The continent is a contrasting mix of countries – with many appearing near the bottom of the worldwide GDP rankings, while South Africa is close to being the 30th largest economy and Nigeria has leapt ahead to just outside the top 20. By 2030, Nigeria is expected to be the first African nation to achieve GDP of $1 trillion. The sub-Saharan region as a whole is currently at $1.6 trillion, just short of that of Canada.

Data quality is often poor and actual growth is considered to be faster than the official GDP numbers suggest. For a start, countries are in the throes of re-basing their GDP figures. When Ghana did so in 2010, its economy turned out to be 63% larger than previously thought. For Nigeria in 2014, the impact was a more dramatic 89% increase – overnight, the country became the largest in Africa and 26th largest worldwide.

While Africa has seen surging inflows from foreign direct investment and private portfolio investment in recent years, investors – especially those new to the region – are often shooting in the dark when it comes to data. "The African GDP numbers are not necessarily a good basis for determining growth and investment opportunities," Razia Khan, Head of Macro Research, Africa for Standard Chartered tells us. She predicts that Africa is growing "faster than we've thought all along. The scale of GDP rebasing that we have seen in a number of countries proves this."

Growth is being driven by myriad factors, with developments in agriculture, telecommunications and infrastructure. Economic reforms have encouraged business and investment, and social reform has helped grow Africa's middle class. Leapfrogging technology means that Africa leads the world in many areas, such as mobile payments. In June 2015, Tanzania saw its Dar es Salaam Stock Exchange become the first African bourse to allow trading via a smartphone platform.

Through a range of initiatives, the African Union is working to ensure stability and strong governance, while bridging cultural and linguistic gaps, to aid development across the continent. Broader integration will drive growth outside the major hubs of Nigeria, South Africa and the oil-rich northern states. According to Vincent Palmade, lead economist in the private and financial sector group for the Africa region at the World Bank: "The macroeconomic environment has improved dramatically along with infrastructure and IT, the African labour force is increasingly competitive, and there's fast growth and more regional market integration."

While progress is being made, huge advances still lie ahead. According to UNICEF, Sub-Saharan Africa is home to more than half of the 58 million children worldwide who are not in education, particularly girls and young women. More than one in five Africans aged 15-24 is unemployed, and just one-third have completed primary school. Despite some progress, the rate of higher education remains low. The effective expansion of education, skills and job opportunities are critical for the region to deliver sustainable economic growth.

Sub-Saharan Africa's asset pools

Through compiling data from several sources, we have attempted to size the asset pools across Sub-Saharan Africa.

Sovereign wealth funds (SWF)

Across the continent as a whole, sovereign wealth funds constitute an asset pool of some $130bn, representing 2% of the world's total. While the oil-rich northern states of Algeria and Libya boast the largest funds of $50bn and $66bn respectively, the SWF asset pool in Sub-Saharan Africa amounts to a little over $14bn, across fledgling funds in eight countries.

Collective investment schemes (CIS)

Collective investment schemes are well developed in South Africa, accounting for a pool of more than $170bn as at March 31, 2015, and also in the offshore location of Mauritius, which has in excess of $50bn. Nigeria has a fledgling sector for commingled investment, with assets of just $1bn currently – but the number of funds has grown four-fold from 14 in 2002. Other countries with collective investment schemes include Botswana, Egypt, Ghana, Kenya, Morocco, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.

Pension funds

South Africa has a well-developed pensions industry, with some $580bn of assets under management, of which a little more than $100bn is accounted for by the Government Employees Pension Fund. Elsewhere in Sub-Saharan Africa, the size of the pool is small, but growth rates are astounding. Nine countries – Botswana, Ghana, Kenya, Namibia, Nigeria, Rwanda, Tanzania, Uganda and Zambia – account for $60bn in assets under management. Ghana's pension fund industry reached $2.6bn by 2014, a four-fold increase in six years. Nigeria's industry has tripled in the last five years to some $25bn in assets – with six million contributors and scope for many more Nigerians to sign up for pensions.

The largest pension schemes are usually government and social-security funds as well as local government and parastatal funds, such as Eskom in South Africa, along with those of big corporations and multinationals. The rapid accumulation of assets in several countries across the region is down to the creation of private pension systems under recent reforms. Rates of take-up are increasing, while per-capita incomes rise and workforces expand. Greater urbanization, longer life expectancy and a growing middle class are all contributing to pension fund industries that need to build significant asset pools and diversify their investment portfolios.

Many countries across the continent are implementing regulations which force more employers to provide pensions and require pension funds to appoint professional, third-party asset managers. We are in the early stages of huge growth in the pension pools. So far, only five to ten percent of the population in Sub-Saharan Africa is thought to be covered by pension funds, whereas North Africa has already hit 80%. Pension fund assets are still tiny in comparison to GDP, which in turn is growing fast in many African countries. The world's healthiest pension regimes are those of the Netherlands and Iceland, at around 150% of GDP. In stark contrast, pension fund assets in Nigeria are just 5% of GDP. Southern Africa is generally better served: Botswana has some $6bn in pension assets, or 42% of GDP. Namibia, with a $10bn pool representing 80% of GDP, is hot on the heels of Australia, the UK and the US, which achieve around the 100% mark.

"As the pension reforms take hold, and with expansion in defined contribution schemes, there is an opportunity to enhance investor and pension fund member protection through the provision of independent third-party fund administration," notes Andre le Roux, Head of Business Development and Client Management for Africa at Maitland.

High net worth individuals (HNWI)

Across the world, high net worth individuals represent a ballooning asset pool, and Africa is no exception. This group of US$ millionaires is willing to pay for high-quality alpha and is typically not daunted by a lack of liquidity. The size of this pool across the continent was estimated at $1.3 trillion in 2013, with compound annual growth predicted at 8%, according to McKinsey's Global Private Banking Survey, the most recent of their studies to state a figure for Africa. We estimate that Sub-Saharan Africa might account for some $300bn currently.

The number of ultra-high net worth individuals – those with at least $30 million in assets – in Africa is set to increase by 59% over the next 10 years, larger than the 34% projected global growth, according to Wealth Report 2015, compiled by Knight Frank with support from Standard Bank Wealth and Investment.

Insurance companies

In South Africa, insurance companies have some $170bn of assets under management. The

insurance industry is generally an underdeveloped part of the financial sector in other sub-Saharan countries.

Serving the asset pools

Several leading asset managers are reaching out to serve these asset pools. "In Botswana, Namibia, Swaziland and Lesotho, our focus is on the government employees' retirement funds," explains Thabo Khojane, Managing Director, Africa Client Group for Investec Asset Management. "They represent the large majority of savings in those markets. More broadly, if we include East and West Africa, our focus there is on central banks and sovereign wealth funds."

What to invest in?

For many economies across Africa, including that of South Africa, GDP growth has been held back by inadequate infrastructure, especially in transport and electricity supply. Nigeria stands out: with a larger GDP than South Africa, and three times its population, electricity production is a paltry 10% of that of South Africa. Dr Mark Mobius, Executive Chairman of Templeton Emerging Markets Group, points out that the installed electricity generation capacity for the whole of Sub-Saharan Africa, excluding South Africa, only amounts to that of Poland or Sweden. "One of my trips to Nigeria was enlivened by a power cut that left us stranded in the elevator at one of Lagos's most prestigious hotels. For factories and hospitals, such interruptions can be more than inconveniencing."

Private equity is currently the primary source of finance for infrastructure and agriculture and there is scope for greater participation by pension funds and sovereign wealth funds as the ideal source of patient capital. More work needs to be done to increase the supply of investable projects and to increase the capacity of the pension and other asset pools to invest in them, whether directly or through infrastructure fund managers. Improvements in governance across many parts of the continent are beginning to pay off, with infrastructure investments in particular now seen as high-quality assets for diversifying risk and return profiles.

"One of the keys to unlocking Africa's potential is rapid development of the capital markets,"says Mr le Roux. "Unlike South Africa, whose mining boom in the 19th century was financed and facilitated by a Johannesburg Stock Exchange, much of Africa's current development is on the back of oil discoveries and financed by the big multinational oil majors, while the large multinational mobile telephony providers have also invested heavily."

The capital markets have a crucial part to play in the transformation of the continent's emerging nations from primarily agricultural societies to become mature industrialized economies. They can facilitate investment in capital-intensive smelting, refining and manufacturing, to bring to historically disadvantaged communities in Africa ‘mineral benefication' – participation in successive levels of the value-added processing of raw materials into high-value goods.

A growing middle class, with greater disposable income, offers up early potential for driving strong economic growth in many countries. Africa's entrepreneurs – and the burgeoning corporate finance boutiques and investment banks – are beginning to present attractive opportunities for domestic and international investors. However, they have a way to go in delivering a strong pipeline of investment-ready projects to keep up with demand.

Lack of liquidity is a major drawback across the continent. In South Africa, with its world-class Johannesburg Stock Exchange, liquidity leaked out with the likes of Old Mutual moving their listing from Johannesburg to London. Many holdings belong to long-term investors with, for example, the Government Employees Pension Fund accounting for some 13% of market capitalization, while also being the country's largest investor in commercial property. "Markets in Africa other than South Africa do suffer from the ‘rush to the gate' syndrome," says Duncan Smith, Senior Business Development Manager, Emerging Markets at Societe Generale Securities Services. "Long-term investors are only willing to sell at their price, so when an investor wishes to acquire a significant holding, the price can be affected severely. Steps are being taken to try to increase liquidity, such as through cross-listing of South African exchange-traded funds for distribution into other countries, while there is also an ongoing initiative to switch over-the-counter trading to exchange-based trading."

The smaller capital markets in the region can be treacherous, with big funds snapping up promising new investments as they surface, and a general reluctance to release existing holdings into the liquidity pool for other investors and traders. A rapidly growing pension pool chasing too few investments is thought to have been a principal factor behind the 79% surge in the Ghana stock market in 2013. According to Eyamba Nzekwu of Nigeria's Pencom: "Savings are growing much faster than products are being brought to the market to absorb these funds."

Regulators should encourage local fund managers and dealers to upgrade their skills in proactively picking and trading African equities and fixed-income instruments. They should also widen the space, taking steps to boost liquidity. One way they can do this is to lift restrictions on cross-border investment.

Quickly gaining interest in the region are crowdfunding initiatives, such as JumpStart Africa and Venture Capital for Africa, with their number doubling each year between 2011 and 2014. While still in need of proper regulation to reassure investors, these platforms have a distinct advantage in that their success extends beyond their location, providing huge potential for growth over the whole continent. A prime example is 'Silicon Savannah' in Nairobi, Kenya, which is disrupting the dominance of South Africa and Nigeria.

Africa on a strong growth trajectory

In discussion with Joseph Rohm and Khaya Gobodo, portfolio managers in Investec's Frontier Markets Team, we examine the changing scene for investment into African markets.

Insight: How is Africa of today different to Africa 20 or 30 years ago?

Joseph Rohm: Africa today is different in a number of ways. The key difference is that the continent is largely at peace, which has allowed democratization to thrive. Other major differences include better macroeconomic management following structural reforms that were put in place by the World Bank in the early '90s. Not only is the continent largely democratic, there is fundamental difference in the perception of Africa by the rest of the world. Critically, there is a greater willingness to do business with the continent, beyond the exploitative extraction of natural resources.

Insight: Which markets in Africa excite you the most?

Khaya Gobodo: Tanzania and Ethiopia are two markets with enormous potential. They are both very populous countries that are experiencing strong growth. Also, Kenya is an exciting place. Not only is it doing well today in terms of growth and general macroeconomic management, but there is an energy that's driving significant innovation and the regional integration presents significant opportunity.

Insight: What is your view on Nigeria, its recent downgrade, the impact of oil prices and Boko Haram activities?

Khaya Gobodo: There is renewed hope in Nigeria following the recent election that has brought General Buhari to power. He is an ex-military general who will clamp down on Boko Haram and corruption in the oil industry. Nigeria is due a challenging 2015 as a result of the decline of the oil price and the impact that has had on the fiscal and balance of payment position of the country. Surprisingly, the downgrade has had a smaller impact on the cost of capital for Nigeria than the reduction of the risk premium due to the passage of a smooth election. There is a great deal of hope the new administration will deal decisively with two of the key issues facing Nigeria: security and corruption. However over the longer term, the structural growth story for Nigeria remains exciting.

Insight: What is your view on East Africa and its growth?

Joseph Rohm: East Africa is benefitting from increased integration and trade across the region. The East African stocks we invest in tend to operate across five or six countries in the region. East Africa is a net importer of oil and hence has started to benefit from the lower oil price. It is worth noting this East African growth isn't without some risk. In terms of Kenya, which is a key engine of growth, it has some external vulnerabilities given its sensitivity to the success of the crop season and the twin deficits it runs.

Insight: What is your view on lesser-known, smaller markets and what opportunities do you see there?

Joseph Rohm: Over time, I expect to see more investable opportunities from smaller markets. Umeme in Uganda is a great example of a relatively new opportunity that has come out of a smaller market. This is a very exciting electricity distribution company that we were instrumental in bringing to market. Botswana is also a great example of a smaller market that is growing its stock market. Another interesting example is Zimbabwe: given that the outcome for the country is binary, the market has priced the equity very harshly. There are some very good businesses that are very well managed and would do extremely well if the operating environment were to normalize.

Insight: Last year wasn't an easy year for African markets. What are your expectations going forward?

Khaya Gobodo: The successful Nigerian election has significantly improved the outlook for our key market on the continent. The political transformation in Egypt is also coming to an end, allowing a big pick-up in Egyptian GDP growth. Outside of the oil-producing countries, the continent will continue to enjoy strong GDP growth of 4.5%. The valuation of some of the key markets – particularly Nigeria – remains attractive, especially when compared to developed markets. Given the improvement in the macroeconomic outlook for the second half of 2015 and the resulting improvement in earnings trajectory, 2015 looks much better than 2014. An important risk to that outlook is the strong dollar impact on African currencies and an unexpectedly rapid rise in US interest rates.

Insight: What will be the biggest change investors in Africa will experience during the next five years?

Khaya Gobodo: Improvements in market liquidity. While this has been a big disappointment in the last ten years, we have seen market liquidity improve over the last twelve months. For example, Nigeria used to trade $5 million per day one year ago, today that number is greater than $20 million on any given day.

Insight: What is driving the improved liquidity?

Joseph Rohm: Firstly, a number of private equity firms exiting the first round of funding that was done eight years ago. Secondly, the growth of the domestic pension fund industries. In Nigeria this has grown ten-fold, from $3bn to $30bn of assets under management, within the last three years.





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Since the beginning of the millennium, trade between Africa and China has expanded nearly seventeen-fold to $135bn, and trade with India six-fold to $55bn. Trade among African countries has doubled since 1990 and there is still huge potential, with intra-regional trade accounting for just 12% of the continent's total exports and imports. In the Republic of South Africa, economic growth was constrained due to its system of apartheid, introduced in 1948, and the consequential international sanctions encouraging divestment – first advocated in the 1960s and taking hold widely in the 1980s. The election in 1994 of Nelson Mandela, the president of the African National Congress, to head South Africa's first multiethnic government was the dawn of a new era – with the country transitioning swiftly from an insular economy to a global trading nation. Cross-border investment grew rapidly – inbound from international institutions and outbound by pension funds, life insurers and collective investment schemes.

International institutional investors are already waking up to the potential across the African continent. In April 2015, the $180bn New York State Common Retirement Fund announced plans to invest as much as 3% of its assets in Africa over the next five years to diversify its portfolio and boost returns. This funding is likely to go to private equity and venture capital firms, along with real estate and new infrastructure projects such as power plants, according to Chief Investment Officer Vicki Fuller, with priority given to local asset managers. For infrastructure projects, the pension plan may team up with sovereign wealth funds and other pension funds.

The continent is a contrasting mix of countries – with many appearing near the bottom of the worldwide GDP rankings, while South Africa is close to being the 30th largest economy and Nigeria has leapt ahead to just outside the top 20. By 2030, Nigeria is expected to be the first African nation to achieve GDP of $1 trillion. The sub-Saharan region as a whole is currently at $1.6 trillion, just short of that of Canada.

Data quality is often poor and actual growth is considered to be faster than the official GDP numbers suggest. For a start, countries are in the throes of re-basing their GDP figures. When Ghana did so in 2010, its economy turned out to be 63% larger than previously thought. For Nigeria in 2014, the impact was a more dramatic 89% increase – overnight, the country became the largest in Africa and 26th largest worldwide.

While Africa has seen surging inflows from foreign direct investment and private portfolio investment in recent years, investors – especially those new to the region – are often shooting in the dark when it comes to data. "The African GDP numbers are not necessarily a good basis for determining growth and investment opportunities," Razia Khan, Head of Macro Research, Africa for Standard Chartered tells us. She predicts that Africa is growing "faster than we've thought all along. The scale of GDP rebasing that we have seen in a number of countries proves this."

Growth is being driven by myriad factors, with developments in agriculture, telecommunications and infrastructure. Economic reforms have encouraged business and investment, and social reform has helped grow Africa's middle class. Leapfrogging technology means that Africa leads the world in many areas, such as mobile payments. In June 2015, Tanzania saw its Dar es Salaam Stock Exchange become the first African bourse to allow trading via a smartphone platform.

Through a range of initiatives, the African Union is working to ensure stability and strong governance, while bridging cultural and linguistic gaps, to aid development across the continent. Broader integration will drive growth outside the major hubs of Nigeria, South Africa and the oil-rich northern states. According to Vincent Palmade, lead economist in the private and financial sector group for the Africa region at the World Bank: "The macroeconomic environment has improved dramatically along with infrastructure and IT, the African labour force is increasingly competitive, and there's fast growth and more regional market integration."

While progress is being made, huge advances still lie ahead. According to UNICEF, Sub-Saharan Africa is home to more than half of the 58 million children worldwide who are not in education, particularly girls and young women. More than one in five Africans aged 15-24 is unemployed, and just one-third have completed primary school. Despite some progress, the rate of higher education remains low. The effective expansion of education, skills and job opportunities are critical for the region to deliver sustainable economic growth.

Sub-Saharan Africa's asset pools

Through compiling data from several sources, we have attempted to size the asset pools across Sub-Saharan Africa.

Sovereign wealth funds (SWF)

Across the continent as a whole, sovereign wealth funds constitute an asset pool of some $130bn, representing 2% of the world's total. While the oil-rich northern states of Algeria and Libya boast the largest funds of $50bn and $66bn respectively, the SWF asset pool in Sub-Saharan Africa amounts to a little over $14bn, across fledgling funds in eight countries.

Collective investment schemes (CIS)

Collective investment schemes are well developed in South Africa, accounting for a pool of more than $170bn as at March 31, 2015, and also in the offshore location of Mauritius, which has in excess of $50bn. Nigeria has a fledgling sector for commingled investment, with assets of just $1bn currently – but the number of funds has grown four-fold from 14 in 2002. Other countries with collective investment schemes include Botswana, Egypt, Ghana, Kenya, Morocco, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.

Pension funds

South Africa has a well-developed pensions industry, with some $580bn of assets under management, of which a little more than $100bn is accounted for by the Government Employees Pension Fund. Elsewhere in Sub-Saharan Africa, the size of the pool is small, but growth rates are astounding. Nine countries – Botswana, Ghana, Kenya, Namibia, Nigeria, Rwanda, Tanzania, Uganda and Zambia – account for $60bn in assets under management. Ghana's pension fund industry reached $2.6bn by 2014, a four-fold increase in six years. Nigeria's industry has tripled in the last five years to some $25bn in assets – with six million contributors and scope for many more Nigerians to sign up for pensions.

The largest pension schemes are usually government and social-security funds as well as local government and parastatal funds, such as Eskom in South Africa, along with those of big corporations and multinationals. The rapid accumulation of assets in several countries across the region is down to the creation of private pension systems under recent reforms. Rates of take-up are increasing, while per-capita incomes rise and workforces expand. Greater urbanization, longer life expectancy and a growing middle class are all contributing to pension fund industries that need to build significant asset pools and diversify their investment portfolios.

Many countries across the continent are implementing regulations which force more employers to provide pensions and require pension funds to appoint professional, third-party asset managers. We are in the early stages of huge growth in the pension pools. So far, only five to ten percent of the population in Sub-Saharan Africa is thought to be covered by pension funds, whereas North Africa has already hit 80%. Pension fund assets are still tiny in comparison to GDP, which in turn is growing fast in many African countries. The world's healthiest pension regimes are those of the Netherlands and Iceland, at around 150% of GDP. In stark contrast, pension fund assets in Nigeria are just 5% of GDP. Southern Africa is generally better served: Botswana has some $6bn in pension assets, or 42% of GDP. Namibia, with a $10bn pool representing 80% of GDP, is hot on the heels of Australia, the UK and the US, which achieve around the 100% mark.

"As the pension reforms take hold, and with expansion in defined contribution schemes, there is an opportunity to enhance investor and pension fund member protection through the provision of independent third-party fund administration," notes Andre le Roux, Head of Business Development and Client Management for Africa at Maitland.

High net worth individuals (HNWI)

Across the world, high net worth individuals represent a ballooning asset pool, and Africa is no exception. This group of US$ millionaires is willing to pay for high-quality alpha and is typically not daunted by a lack of liquidity. The size of this pool across the continent was estimated at $1.3 trillion in 2013, with compound annual growth predicted at 8%, according to McKinsey's Global Private Banking Survey, the most recent of their studies to state a figure for Africa. We estimate that Sub-Saharan Africa might account for some $300bn currently.

The number of ultra-high net worth individuals – those with at least $30 million in assets – in Africa is set to increase by 59% over the next 10 years, larger than the 34% projected global growth, according to Wealth Report 2015, compiled by Knight Frank with support from Standard Bank Wealth and Investment.

Insurance companies

In South Africa, insurance companies have some $170bn of assets under management. The

insurance industry is generally an underdeveloped part of the financial sector in other sub-Saharan countries.

Serving the asset pools

Several leading asset managers are reaching out to serve these asset pools. "In Botswana, Namibia, Swaziland and Lesotho, our focus is on the government employees' retirement funds," explains Thabo Khojane, Managing Director, Africa Client Group for Investec Asset Management. "They represent the large majority of savings in those markets. More broadly, if we include East and West Africa, our focus there is on central banks and sovereign wealth funds."

What to invest in?

For many economies across Africa, including that of South Africa, GDP growth has been held back by inadequate infrastructure, especially in transport and electricity supply. Nigeria stands out: with a larger GDP than South Africa, and three times its population, electricity production is a paltry 10% of that of South Africa. Dr Mark Mobius, Executive Chairman of Templeton Emerging Markets Group, points out that the installed electricity generation capacity for the whole of Sub-Saharan Africa, excluding South Africa, only amounts to that of Poland or Sweden. "One of my trips to Nigeria was enlivened by a power cut that left us stranded in the elevator at one of Lagos's most prestigious hotels. For factories and hospitals, such interruptions can be more than inconveniencing."

Private equity is currently the primary source of finance for infrastructure and agriculture and there is scope for greater participation by pension funds and sovereign wealth funds as the ideal source of patient capital. More work needs to be done to increase the supply of investable projects and to increase the capacity of the pension and other asset pools to invest in them, whether directly or through infrastructure fund managers. Improvements in governance across many parts of the continent are beginning to pay off, with infrastructure investments in particular now seen as high-quality assets for diversifying risk and return profiles.

"One of the keys to unlocking Africa's potential is rapid development of the capital markets,"says Mr le Roux. "Unlike South Africa, whose mining boom in the 19th century was financed and facilitated by a Johannesburg Stock Exchange, much of Africa's current development is on the back of oil discoveries and financed by the big multinational oil majors, while the large multinational mobile telephony providers have also invested heavily."

The capital markets have a crucial part to play in the transformation of the continent's emerging nations from primarily agricultural societies to become mature industrialized economies. They can facilitate investment in capital-intensive smelting, refining and manufacturing, to bring to historically disadvantaged communities in Africa ‘mineral benefication' – participation in successive levels of the value-added processing of raw materials into high-value goods.

A growing middle class, with greater disposable income, offers up early potential for driving strong economic growth in many countries. Africa's entrepreneurs – and the burgeoning corporate finance boutiques and investment banks – are beginning to present attractive opportunities for domestic and international investors. However, they have a way to go in delivering a strong pipeline of investment-ready projects to keep up with demand.

Lack of liquidity is a major drawback across the continent. In South Africa, with its world-class Johannesburg Stock Exchange, liquidity leaked out with the likes of Old Mutual moving their listing from Johannesburg to London. Many holdings belong to long-term investors with, for example, the Government Employees Pension Fund accounting for some 13% of market capitalization, while also being the country's largest investor in commercial property. "Markets in Africa other than South Africa do suffer from the ‘rush to the gate' syndrome," says Duncan Smith, Senior Business Development Manager, Emerging Markets at Societe Generale Securities Services. "Long-term investors are only willing to sell at their price, so when an investor wishes to acquire a significant holding, the price can be affected severely. Steps are being taken to try to increase liquidity, such as through cross-listing of South African exchange-traded funds for distribution into other countries, while there is also an ongoing initiative to switch over-the-counter trading to exchange-based trading."

The smaller capital markets in the region can be treacherous, with big funds snapping up promising new investments as they surface, and a general reluctance to release existing holdings into the liquidity pool for other investors and traders. A rapidly growing pension pool chasing too few investments is thought to have been a principal factor behind the 79% surge in the Ghana stock market in 2013. According to Eyamba Nzekwu of Nigeria's Pencom: "Savings are growing much faster than products are being brought to the market to absorb these funds."

Regulators should encourage local fund managers and dealers to upgrade their skills in proactively picking and trading African equities and fixed-income instruments. They should also widen the space, taking steps to boost liquidity. One way they can do this is to lift restrictions on cross-border investment.

Quickly gaining interest in the region are crowdfunding initiatives, such as JumpStart Africa and Venture Capital for Africa, with their number doubling each year between 2011 and 2014. While still in need of proper regulation to reassure investors, these platforms have a distinct advantage in that their success extends beyond their location, providing huge potential for growth over the whole continent. A prime example is 'Silicon Savannah' in Nairobi, Kenya, which is disrupting the dominance of South Africa and Nigeria.

Africa on a strong growth trajectory

In discussion with Joseph Rohm and Khaya Gobodo, portfolio managers in Investec's Frontier Markets Team, we examine the changing scene for investment into African markets.

Insight: How is Africa of today different to Africa 20 or 30 years ago?

Joseph Rohm: Africa today is different in a number of ways. The key difference is that the continent is largely at peace, which has allowed democratization to thrive. Other major differences include better macroeconomic management following structural reforms that were put in place by the World Bank in the early '90s. Not only is the continent largely democratic, there is fundamental difference in the perception of Africa by the rest of the world. Critically, there is a greater willingness to do business with the continent, beyond the exploitative extraction of natural resources.

Insight: Which markets in Africa excite you the most?

Khaya Gobodo: Tanzania and Ethiopia are two markets with enormous potential. They are both very populous countries that are experiencing strong growth. Also, Kenya is an exciting place. Not only is it doing well today in terms of growth and general macroeconomic management, but there is an energy that's driving significant innovation and the regional integration presents significant opportunity.

Insight: What is your view on Nigeria, its recent downgrade, the impact of oil prices and Boko Haram activities?

Khaya Gobodo: There is renewed hope in Nigeria following the recent election that has brought General Buhari to power. He is an ex-military general who will clamp down on Boko Haram and corruption in the oil industry. Nigeria is due a challenging 2015 as a result of the decline of the oil price and the impact that has had on the fiscal and balance of payment position of the country. Surprisingly, the downgrade has had a smaller impact on the cost of capital for Nigeria than the reduction of the risk premium due to the passage of a smooth election. There is a great deal of hope the new administration will deal decisively with two of the key issues facing Nigeria: security and corruption. However over the longer term, the structural growth story for Nigeria remains exciting.

Insight: What is your view on East Africa and its growth?

Joseph Rohm: East Africa is benefitting from increased integration and trade across the region. The East African stocks we invest in tend to operate across five or six countries in the region. East Africa is a net importer of oil and hence has started to benefit from the lower oil price. It is worth noting this East African growth isn't without some risk. In terms of Kenya, which is a key engine of growth, it has some external vulnerabilities given its sensitivity to the success of the crop season and the twin deficits it runs.

Insight: What is your view on lesser-known, smaller markets and what opportunities do you see there?

Joseph Rohm: Over time, I expect to see more investable opportunities from smaller markets. Umeme in Uganda is a great example of a relatively new opportunity that has come out of a smaller market. This is a very exciting electricity distribution company that we were instrumental in bringing to market. Botswana is also a great example of a smaller market that is growing its stock market. Another interesting example is Zimbabwe: given that the outcome for the country is binary, the market has priced the equity very harshly. There are some very good businesses that are very well managed and would do extremely well if the operating environment were to normalize.

Insight: Last year wasn't an easy year for African markets. What are your expectations going forward?

Khaya Gobodo: The successful Nigerian election has significantly improved the outlook for our key market on the continent. The political transformation in Egypt is also coming to an end, allowing a big pick-up in Egyptian GDP growth. Outside of the oil-producing countries, the continent will continue to enjoy strong GDP growth of 4.5%. The valuation of some of the key markets – particularly Nigeria – remains attractive, especially when compared to developed markets. Given the improvement in the macroeconomic outlook for the second half of 2015 and the resulting improvement in earnings trajectory, 2015 looks much better than 2014. An important risk to that outlook is the strong dollar impact on African currencies and an unexpectedly rapid rise in US interest rates.

Insight: What will be the biggest change investors in Africa will experience during the next five years?

Khaya Gobodo: Improvements in market liquidity. While this has been a big disappointment in the last ten years, we have seen market liquidity improve over the last twelve months. For example, Nigeria used to trade $5 million per day one year ago, today that number is greater than $20 million on any given day.

Insight: What is driving the improved liquidity?

Joseph Rohm: Firstly, a number of private equity firms exiting the first round of funding that was done eight years ago. Secondly, the growth of the domestic pension fund industries. In Nigeria this has grown ten-fold, from $3bn to $30bn of assets under management, within the last three years.