Commercial Knowledge: Africa & Emerging Markets

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An area of commercial knowledge that is often probed is emerging markets. If you’re applying for a large multinational firm, you will often be asked where you might open a new office, or where you see the economy moving in the common years. You should have a concept of an ‘emerging market’ and a good idea of a particular area that is set to boom in the coming years. Here, we will focus on Africa.

What is an emerging market? Core Info for Training Contract Interviews

Emerging markets are typically defined through five core characteristics:

– Lower than average per capita income (less than $4035)
– Rapid economic growth
– Highly volatile economy due to external factors, domestic policy or natural disasters (or a combination thereof)
– Less mature capital markets
– Return on investment is higher than average

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Why Africa?

We can break this down into four areas: economic growth, population growth, abundance of natural resources, and the low cost of labour.

Africa is experiencing a period of rapid economic growth, with PwC recently forecasting 3.2% this year and 3.5% in 2022. The best performing countries on the continent are Ethiopia, Ivory Coast and Rwanda, with growth of 8.5%, 7.4% and 7.2% respectively. This far outperforms the growth in Brazil, currently around 1.3%, and Russia, for example, which is currently around 1.5%. The high economic growth is illustrative of increased market demand – meaning that investing in the area is likely to yield profits.

Africa’s population growth is growing in tandem with its economy. By 2030, its population is forecast to be 1.5 billion, an increase of almost 50%. There is a fast-developing middle class, who have increased purchasing power – making it all the more attractive to businesses looking to invest.

Africa is home to much of the world’s natural resources. It has 90% of the world’s supply of platinum and cobalt, half of the world’s supply of gold, ⅔ of the world’s supply of manganese and around ⅓ of the world’s supply of uranium. There are likely many more assets hidden beneath African ground, which could fuel future growth in the future.

As it stands, China remains ‘the factory of the world,’ but this is changing. China’s ability to supply labour has shrunk, due to a combination of rising wages and the one-child policy. China might be on the brink of moving from low skilled manufacturing jobs into other areas which require higher skill and thus higher wages. As this happens, we would expect to see around 100 million low-skill labour jobs become available. These roles will likely be filled by Africa, which will have the largest supply of labour in the world in the coming years, and a very low labour cost. An Ethiopian worker currently costs around 25% as much as a Chinese worker in the same field. Ironically, recent years have seen huge Chinese investments in Africa, focused on everything from highways to factories.

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Where to Invest

As it stands, there is no particular hub into which investment seems more attractive than elsewhere in the continent. Some countries have invested in Moroccan offices – like DLA Piper and Clifford Chance – while others are firmly invested in South Africa. South Africa has greater levels of PE and M&A activity than elsewhere on the continent, technology and telecoms which surpass other countries on it, and natural resources to equal other countries there. DLA Piper, Hogan Lovells, Allen & Overy and Baker McKenzie are all present in Johannesburg, as well as the South African ‘Big Five’ of Bowman Gilfillan, Cliffe Dekker Hofmeyr, ENSafrica, Norton Rose Fulbright and Webber Wentzel.

North African markets outside of Morocco are generally seen as less attractive due to ongoing tension in these areas. Tunisia and Algeria, which might previously have seen investment, are much less likely to be targets for firms looking to expand now.

However, the Sub-Saharan area is tipped to boom in coming years. In particular, Abidjan in the Ivory Coast is the headquarters of the African Development Bank, making it attractive for firms focused on banking & finance. Lagos, Nigeria, is forecast to become the most populous city in the world by 2050, and this might make a presence there a worthwhile investment in the future.

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