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

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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 [e-mail].


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.

Episode Transcript

Lindsey Helman (00:05):
Hello and welcome to Financial
Perspectives, a CFA Society SanFrancisco podcast where we
interview and discuss trendswith leaders from across the
investment and finance industry.
This month, our host, TanyaSuba-Tang, membership Director
with CFA Society San Francisco,had the pleasure of speaking
with Rick Rikoski, chiefEconomist at Democracy

(00:28):
Investments.
Listen in as they explore thegrowth potential of frontier
markets in Africa.

Tanya Suba-Tang (00:40):
Rick, good morning.
Thank you so much for joiningme today.
How are you?

Rick Rikoski, PhD (00:43):
Doing Great Thanks for having me.

Tanya Suba-Tang (00:45):
So I'm so excited to have a conversation
with you.
You and I are going to betalking a little bit about
frontier markets and I'm sure alot of people heard of emerging
markets, and when they hearemerging markets they hear India
or China, but today we're goingto be talking about frontier
markets.
First, let's frame this okay.
Why frontier markets?

(01:06):
And, specifically when we talkfrontier markets, why Africa?

Rick Rikoski, PhD (01:10):
Okay, well, first of all, the number that
jumps out to me mostimpressively is simply the rapid
growth of Nigeria.
Nigeria was maybe 90 millionpeople in the 90s.
Today it's 225 million people.
They just passed Brazil tobecome the sixth largest country
on Earth.
And if you look at populationgrowth between now and 2100, the
United States is expected togrow by 150 million people,

(01:33):
india by 250 million people,africa by 2.4 billion people,
and the entire rest of the worldis net zero.
So the demographic trends pointtowards Africa.
On top of that, the world isevolving.
The G7, classically, were thedeveloped countries, the BRICS
were the emerging markets, andthen, aside from the BRICS, you
also had sort of sanctionedmarkets that are unreachable,

(01:54):
like, right now, the MoscowStock Exchange, the Tehran Stock
Exchange.
But the BRICS are evolving andexpanding.
They've turned into a biggercoalition, trying to pull in
other countries that mightpotentially be sanctioned, such
as they pulled in Iran, egypt,ethiopia, indonesia, and so this
is this massive group that'sexpanding and at the same time,

(02:16):
you see countries like China,mexico and Russia all reaching
the middle income trap.
They all have about a $12,000per capita GDP and although we
historically create jobs bycreating new industries and then
shedding our old, lower payingindustries to countries like
China.
China is now doing the samething and beginning to outsource

(02:37):
, mexico is beginning tooutsource, et cetera.
But Mexico can outsource toLatin America, china can
outsource to Southeast Asia, theMiddle Eastern countries can
outsource the surrounding MiddleEastern countries, but those
are smaller countries and theydon't have the economies of
scale.
When you're outsourcing, it'snot 1.5 billion people with
common laws, so everyone sort ofhas this incentive to go where
the people are, where thecountries are big, where the

(03:00):
languages are repeated and thelegal systems are repeated, and
that suggests that all roadseventually lead to Africa.

Tanya Suba-Tang (03:06):
Several African countries with developing
financial markets are attractinginstitutional investors, so
promising to become part of asecond generation of emerging
market countries.
Can you give our listeners somefoundation?
Can you share with us whatAfrica's financial situation was
like, maybe 15 to 20 years ago?

Rick Rikoski, PhD (03:25):
Yes, so Africa is, and the Middle East,
because they all kind of tend toget lumped together, especially
around Egypt.
20 years ago most of theinvestment was in a democratic
economy.
The average dollar was in ademocracy, at least in terms of
publicly traded investments, andthat meant South Africa or
Israel.
And for the most part this wasin that intermediate time after

(03:46):
the end of the Cold War, thebeginning of the war on terror,
and African markets were kind ofreally resource extraction
driven.
At the same time you saw, youknow, the inklings of political
reform.
This was around the time thatNigeria passed a constitutional
amendment creating ademocratically elected leader
rather than just having adictator, and Nigeria promptly

(04:08):
went and reelected an olddictator and he tried to make
himself dictator for life andCondoleezza Rice went in and
pretty much talked him out of itand George Bush came in with an
assist, and so there was a lotof guidance from the US as well
in this era towards politicaland market reform.
But most of the economicactivity big picture was still

(04:29):
South Africa-centric andmining-centric.

Tanya Suba-Tang (04:32):
So fast forward to the last 10 years.
What opportunities do you seethere and what are peaking in
financial investors' interests?

Rick Rikoski, PhD (04:40):
So, first of all, china has pursued the Belt
and Road Initiative and they'veexpanded out towards African
markets.
We've seen China DevelopmentBank going into Africa, making
infrastructure investmentscombined with loans.
Those loans often are supposedto be repaid in terms of
resources which are sold toChina at essentially below

(05:01):
market prices.
This ensures the supply chainfor China.
So we've seen quite a bit ofthat.
We've also seen significantbooming populations.
Some of the countries in Africa.
Their population growth ratesare greater than the United
States GDP growth rate.
Your GDP growth rate is reallythe sum of your per capita GDP

(05:22):
growth rate and your populationgrowth rate.
Some of these African countries, like the Democratic Republic
of the Congo, if they have noincrease in per capita GDP,
their population growth ratestill exceeds our GDP growth
rate.
They're growing like crazy.
I was just looking at thenumbers for Zambia, which is the
most, I think, underlookedcountry out there.
In 2015, I believe, theirpopulation was 14 million people

(05:44):
and they're projected to hit150 million, I think, by 2100.
It's staggering the growthrates for some of these
countries.
So Japan recently fell out ofthe top 10 countries by
population.
Ethiopia is about to pass Japanin population.
Egypt is right up there withabout 110 million people.
The Democratic Republic is, Ithink, behind Egypt, but going

(06:05):
to pass them quickly.
You've got Nigeria's huge,uganda, kenya, ethiopia and
Egypt, democratic Republic ofthe Congo, tanzania and Zambia.
All of those countries will bewell in excess of 100 million
people by the end of the century.
So I think that what you'regoing to see is that we're going
to go into these countries andwe're going to start outsourcing
disproportionately to them,especially because some of these

(06:27):
countries have GDPs below$1,000 per capita in some cases.
The flip side is, I don't thinkthat we're going to invest in
all of them, and it's forseveral different reasons.
First of all, theFrench-speaking countries,
historically, are a mess.
I don't know why, but Francedid not do a period.
If you pull up a list of theFrench-speaking countries and

(06:50):
you pull up a list of theEnglish-speaking countries, then
you cross-compare that withdemocracy index.
It's completely different.
On the English-speaking side,the countries where you're
seeing your genocides and youratrocities they speak French.
So I think that the investmentpatterns we see will, I believe,
flow towards theEnglish-speaking countries.
That's not to say that that'sgoing to guarantee investor

(07:11):
returns.
As we've seen with the G7versus the BRICS, the G7 has had
a lower GDP growth rate overthe last 10, 15 years than the
BRICS, but they've had higherinvestment returns.
Right, gdp growth does notguarantee investment returns,
because corruption has a cost,and that's important, but I
still think there's going to bea bias in favor of the
English-speaking countries.
The other big thing, though, towatch out for in Africa and

(07:33):
these frontier markets is thatthey need to reform their
markets.
Their markets have very highholding costs in some situations
.
I believe Nigeria has an 85basis point annual holding
charge for when you buy stockson their stock exchange.
What does that mean?
It means if you want to get a10% return on an investment,
they have to sell it to you at adiscount in order for you to

(07:55):
still get the same return.
So they're getting 8.5% lessmoney when they go to market to
do a capital raise, which,inherently, is going to slow
their economic growth.
But stocks no one really talksabout this.
With bonds, everyone says, hey,the value of a bond is tied to
interest rates and when interestrates get cut, your bond's
value is going to increase.

(08:16):
Well, oddly enough, with thesemarkets with high holding costs,
if you buy a stock in Africaand all they do is reduce the
holding costs for the exchange,you should immediately see
capital appreciation.
So that itself is a peculiararbitrage opportunity.
But in general, I think thatwe're going to see investment
flows driven by basically justpopulation and based on

(08:38):
outsourcing from the emergingeconomies that are trying to get
better jobs for their peopleand are shedding the older jobs
that don't pay as well.

Tanya Suba-Tang (08:46):
So what do you see?
Limiting Africa investment.

Rick Rikoski, PhD (08:49):
Well, first of all there's the asset charge
problem.
There's also a transportationproblem.
When we talk about rail, forinstance, 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 toreduce the amount of wood you
needed to put in a railroadtrack system.
That's being reformed, so therail system is improving, but

(09:11):
you still can't get out ofAfrica by rail.
The most peculiar thing is thatmaybe it's not peculiar, but
Israel shut off all rail trafficin and out of the country in
1948.
So ignoring the Suez Canal fora second, basically,
historically, there was anoverland connection between
Egypt and Iraq.
Essentially, it's only 650miles from the Nile to the

(09:33):
Euphrates and I think it's like800 miles from Cairo to Baghdad,
and if there was railconnecting those two cities, you
can imagine that that would bevery good for commerce.
But despite all the investmentthat the Chinese have made in
Africa, there's no way over landto take material from Africa
back to China, so it all has tobe done by ship, and we know how
to do this.
This isn't really surprising,right?

(09:55):
I think the Chinese willadequately build out their fleet
, but it's still going to be alimit on African commerce, north
African commerce, middleEastern commerce, because
there's not going to benecessarily great infrastructure
, at least initially, forexchange, and the other side of
it is that there will probablybe a lot of build-out in the
Persian Gulf.
The Russians have been workingwith the Iranians to put in what

(10:17):
they call, I believe, theNorth-South Corridor, connecting
Moscow to the Persian Gulf byrail, and that allows actually
Moscow to then goes Moscow tothe Persian Gulf, then by sea to
Mumbai.
Well, by the same token, if youbring ships in from Africa, it
will release cargo into CentralAsia, and I think that that's a
very, very likely outcome.

(10:37):
Otherwise, you know, to get toCentral Asia for trade it's a
complicated route.
So I think you're going to seemore and more sea lanes and new
ports, not only in Africa but inthe 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 loveto get your insights on what can
we expect regardingopportunities 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 willprobably be the most valuable
asset.
The education profile ischanging.
The technology profiles arechanging.
For instance, we just saw it'skind of a sad story but Russia
poaching high school girls,pretending that they were going
to have job training experiencesand then sending them off to

(11:21):
Russia to build drones for thewar in Ukraine.
But they found them to be agood workforce right.
So on some level that's areally twisted endorsement, but
you're seeing this evolvingeducational system, you're
seeing evolving tech spheres,you're seeing startup hubs.
These are all really, reallypromising developments.
At the same time, in terms ofinvestment opportunities, I

(11:42):
always go back to the Californiagold rush, and the one company
everyone forgets from theCalifornia gold rush is Levi's.
Sometimes the money is not madein mining gold, it's making
pants for miners.
And if you look at Africa, youlook at their infrastructure
situation.
You look at some of thesecountries.
The ratio of GDP to kilowatthours of electricity is such

(12:03):
that if you can give them anextra kilowatt hour of
electricity, it bumps their GDPup by like $25, right?
Clearly, they're going to needa lot of electricity, a lot of
electrical infrastructure, a lotof road infrastructure, rail
infrastructure and, yes, chinais investing in that, partly
Historically, we've done thatthrough USAID.
I don't know if that's going tocontinue, right, but those

(12:23):
opportunities and monetizingthat kind of stuff, because,
while you may not be able topick which sector ultimately is
going to persevere, if someone'sstarting, let's say, a credit
card company in Africa, well,people are going to need credit
cards, they're going to needbanking.
There's so many of these thingsthat we take for granted in our
own sphere that will beduplicated over there.
So I think those are tremendousopportunities, and that's in

(12:47):
addition to things like willpeople be taking advantage of
solar power opportunities in theSahara and feeding Europe?
So I would bet on theunderlying infrastructure that
everybody's going to need, soyou 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 gota lot of takeaways from that
and I really appreciate yourtime 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 intoAfrica's economic landscape and
trends shaping frontier markets.
Join us next time for anotherFinancial Perspectives episode
airing on the last Tuesday ofthe month.
Want to receive a shout out inthe next episode or share your
thoughts?
Send in a message to the showthrough the link at the top of
each episode description, oremail us podcast@cfa-sf.

(13:41):
org.
We love hearing from ourlisteners and look forward to
learning what you thought ofthis episode or any topics that
you'd like for us to cover next.
Thank you for being a dedicatedlistener.
This podcast is produced by CFASociety San Francisco, a

(14:02):
not-for-profit professionalassociation providing
professional learning and careerresources to over 13,000
investment industryprofessionals worldwide.
To learn more about CFA SocietySan Francisco, visit our
website at cfa-sf.
org or connect with us onLinkedIn.