Two trends are likely to drive investment into Africa over the next 12 months. The first is the erosion of confidence in the US dollar and a forecast of depreciation against other currencies. The other is the rising price of commodities. As is the case with many other economic indicators, they are linked. Generally, as the value of the dollar decreases, the price of oil rises. The same is true of other dollar-denominated commodities.
As a result, investors are getting excited about opportunities in emerging markets this year. That’s not just my view, but one supported by the wealth management arm of UBS, which manages more than $4 trillion. UBS recently issued a report saying that the global economy will be helped by vaccine rollouts, a weakening dollar caused partly by uncertainty around US foreign policy, continuing stimulus in major economies and strong commodity prices.
People will have their own views on the efficacy of vaccination rollouts, but nowhere is set to enjoy the benefits of strengthening commodity prices more than Africa.
“This is now a sweet spot for emerging markets,” said Michael Bolliger, chief investment officer for global emerging markets at UBS, in an interview. “And looking at valuation, there are parts of the market where people increasingly worry about things getting expensive. Emerging and frontier markets definitely do not tick these boxes. Particularly outside of Asia, it is lagging on the valuation side, which is another plus.”
UBS expects the MSCI Emerging Markets Index, already up around ten percent this year, to climb to 1,450 by the end of the year, offering a further upside of about five percent from current levels. In a bullish scenario, it could climb to 1,600, delivering gains of more than 15 percent.
These are heady figures. Equally bullish claims are being made by JP Morgan Chase, which, considering rising oil and metal prices, is calling this the start of a new “supercycle” of years-long gains for commodities.
The bank is not alone. Joining the bandwagon are heavyweights Goldman Sachs, Bank of America and even lesser known institutions such as Ospraie Management, which forecasts that government stimulus packages will result in spectacular commodity price rises, the largest in a decade. “We believe that the new commodity upswing, and in particular [an] oil upcycle, has started,” JPMorgan analysts said in an investment note. “The tide on yields and inflation is turning.”
Commodities have seen four supercycles over the past 100 years. The last one peaked in 2008, after 12 years of expansion, with oil at nearly $150 a barrel. That supercycle was prompted by the rapid economic rise of China. This time around, JPMorgan points to several drivers, including a post-pandemic recovery, “ultra-loose” monetary and fiscal policies, a weakening US dollar, the threat of inflation and more aggressive environmental policies around the world.
Similarly, hedge funds haven’t been this bullish on commodities since the mid-2000s, when China was stockpiling everything from copper to cotton. Crop failures and export bans around the world further boosted food prices, eventually toppling governments during the Arab Spring. The backdrop is now starting to look similar with a broad gauge of commodity prices hitting its highest level in six years.
My experience in emerging markets leads me to believe that it won’t be all in one direction. For a start, don’t bet on the dollar heading south as emerging markets start to recover. A surge in inflation poses the biggest risk to the dollar, but as Janet Yellen, the former Fed chair and now US treasury secretary, noted recently, the US is well equipped to handle inflation risks. A stable dollar looks more likely than prolonged declines.
That caveat aside, this looks set to be a year when investors will be welcomed back into Africa, and in my opinion, two countries deserve particular attention: Zimbabwe and Rwanda. Full disclosure: I lead banks in these countries – but that also gives me a unique perch from which to survey the economic landscape.
As the world’s most richly mineralized country, Zimbabwe continues to offer an abundance of natural resource investments. The country is one of the world’s largest gold, diamond and platinum producers, as well as home to vast reserves of tantalum and lithium, the latter being a key ingredient of the batteries that power everything from cell phones to electric cars – and much more to come.
Rwanda, increasingly referred to as the Switzerland of Africa, is becoming an important financial services center. Indeed, it is time many outside the continent started to think of the country beyond the trauma it suffered three decades ago; it is today driven by much more than an episode in history, however tragic. For investors, Rwanda offers exciting opportunities in tea, coffee and natural resources such as tin, tantalum and tungsten.
There is no better time to be in Africa.
Marc Holtzman is chairman of CBZ Holdings and of Bank of Kigali, respectively the largest financial institution in Zimbabwe and Rwanda. He is a former vice chairman of Barclays and a former president of the University of Denver.