Adventure Capitalism: Investing in Africa – Todd Moss

August 13, 2013

Originally published on July 30, 2013.

I suspect that few Wonkcast listeners tune in expecting stock market tips, but my guest this week provides something of the sort. Todd Moss, senior fellow and vice president at CGD, said his recent paper written with Ross Thuotte titled, “Nowhere Left to Hide? Stock Market Correlation, Regional Diversification, and the Case for Investing in Africa,” lays out the potential risks and rewards for investing in the continent.

In writing the paper, Todd said, he and Ross “were looking at different ways of trying to encourage private investment in Africa.” Stock exchanges struck them as a vehicle that is currently underexploited. One potentially big upside: regional diversification.

“During the financial crisis of 2008, if you were investing in Latin America or the big Asian markets, you were getting hammered like everywhere else. There was nowhere left to hide. The interesting thing is Africa did not get hit,” Todd says. He and Ross decided to look more closely into whether Africa offered opportunities for diversification not available in other regional markets.

They found was that all the markets of the world are converging, so the diversification gains achieved by investing in different regions are slowly diminishing. It’s a trend that they traced back two decades. “Africa is part of this trend,” Todd said, “but it’s a notable laggard… Africa is the final frontier.”

I asked about this frontier status, the reputation among financiers that Africa is a sort of Wild West in terms investment. Why, I wondered, would investors approach it?

“The markets are volatile, I don't want to downplay that,” Todd replied. “But I really do believe that if you choose reputable brokerages and reputable banks you have very little to worry about.” 

Todd speaks from firsthand experience. In the late 90s, he and a dozen friends formed an investment club that put money into 6 African countries. He drew upon that experience in a 2003 book from which the title for this blog post is borrowed: Adventure Capitalism: Globalization and the Political Economy of Stock Markets in Africa.

“We had some wild rides,” Todd said. “We had a couple stocks do well, we had a couple de-list. But over an 11 year period, we did 11.5% in US dollar terms per year.”

According to Todd, impressive returns are persuading the financial community to reevaluate investments in African markets. Just this year, he said, “the Ghana stock exchange is up about 50% and the Kenyan and Nigerian stock exchanges are up over 30%.” 

Todd dampened my urge to immediately invest by noting the small size of these African markets.

“The Ghana exchange will trade less in a whole year than New York will trade before they take their first coffee break,” he says.

“In the US we categorize stocks as small cap, micro cap, mid cap and large cap. A mid cap, which is like a mid-size company, has a stock capitalization of between 2-10 billion dollars. Nigeria may be the second biggest exchange in Africa, but it only has 7 companies that would qualify as mid cap in New York. So if you’re a large institutional investor, there are very few companies where you're going to be able to buy large blocks of stock.

“It's just a massive difference in scale,” Todd said. “But that means there's a lot of headroom in these markets to grow.”

Our discussion wrapped up with Todd emphasizing his confidence in African markets.

“I still hold some shares in Botswana. The Botswana stock exchange works as efficiently as any I've ever invested in,” he said.

[Note: Neither this Wonkcast nor the paper constitutes investment advice!]

My thanks to Aaron King for editing the Wonkcast and providing a draft of this blog post.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.