Adventure Capitalism: Investing in Africa – Todd Moss

Summary

Podcast Summary: "Adventure Capitalism: Investing in Africa"

Podcast: The CGD Podcast
Host: Lawrence MacDonald (Center for Global Development)
Guest: Todd Moss, Vice President and Senior Fellow at CGD
Date: July 30, 2013
Episode Theme:
Exploring why Africa’s stock markets are the world’s last true frontier for global investors, how diversification trends have shifted, and what unique challenges and opportunities face those interested in investing in African equities.

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Episode Overview

This episode centers around Todd Moss’s research paper, "Nowhere Left to Stock Market Correlation: Regional Diversification and the Case for Investing in Africa." The discussion examines Africa’s position as the last region offering uncorrelated returns for global investors, the changing realities of risk and opportunity in African markets, and practical avenues for individual and institutional participation.

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Key Discussion Points & Insights

1. Global Market Correlation and the African Outlier

• Historical Shifts in Diversification:
  • Over the past 20 years, global stock markets have become increasingly synchronized, reducing traditional benefits of geographic diversification.
  • Quote: "All the markets of the world are converging... And Africa is part of this trend, but Africa is a notable laggard."
    — Todd Moss [01:55]
• Africa as the ‘Final Frontier’:
  • African markets remain less correlated with major western, Asian, and Latin American markets—making them appealing for diversification.
  • Asian and Latin American markets, once considered “exotic”, now move in near-perfect sync with the S&P 500, lessening diversification benefits.

2. Investor Interest and Perceptions

• Wall Street’s Perspective:

  • Institutional investors are generally aware of global trends. Interest in Africa is increasing, particularly from US pension funds and institutions that historically avoided the continent.
  • Quote: “We are getting those calls... there’s a general increase in investor interest in Africa, including by some US pension funds and other big institutional investors.”
    — Todd Moss [04:36]

• Overcoming the ‘Wild West’ Reputation:

  • Persistent images of scams and instability linger but are less and less accurate for business and financial circles.
  • Quote: "There are still a lot of people that when you say Africa, they think Black Hawk Down Somalia... or they think Nigerian email scam. I think that fortunately that view is increasingly a minority view."
    — Todd Moss [06:50]

• Example of Changing Perceptions:

  • Rwanda’s successful $400 million Eurobond issuance, oversubscribed nearly 9-fold, signals international investor confidence.
  • Quote: “It's still remarkable that you had people willing to put $3.5 billion into a 10 year bond in Rwanda.”
    — Todd Moss [08:38]

3. Returns, Scale, and Liquidity Constraints

• High Returns, Small Markets:
  • Markets like Ghana, Kenya, and Nigeria have delivered impressive recent returns (e.g., Ghana up ~50% in a year).
  • Quote: “Ghana stock exchange is up about 50%. Both the Kenyan and Nigerian stock exchanges are up over 30% this year.”
    — Todd Moss [07:17]
• Challenges for Investors:
  • Market capitalization is tiny compared to developed markets. Example: Nigeria’s entire exchange has only 7 companies of “mid-cap” US size.
  • Liquidity: Trades are thin; few buyers or sellers for large blocks; for instance, Ghana’s yearly volume is less than New York’s before the first coffee break.
  • Quote: “The Ghana stock exchange... trades less than New York will trade before they take their first coffee break.”
    — Todd Moss [10:42]
• Opportunities for Smaller Players:
  • The illiquidity and small scale can mean more growth “headroom” and some advantages for nimble small and mid-size investors.

4. Practical Investment Access and Individual Participation

• Barriers for Individuals:

  • Typical entry into African-focused hedge or specialized funds often requires $1 million+ minimums.
  • Direct Investment: Individuals can invest via global depositary receipts (GDRs/ADRs) for a handful of African companies listed in London or New York.
  • Quote: “You could look at a handful of companies, African companies that are actually listed through GDR and ADR in New York... or you could, if you wanted to really be adventurous, open an account with a stockbroker in one of these markets.”
    — Todd Moss [14:19]

• Personal ‘Adventure Capitalism’:

  • Moss recounts personally investing across 6 African markets, pooling with friends for an “investment club” approach, yielding an average of 11.5% USD returns over 11 years—despite volatility.
  • Quote: “We had some wild rides... over an 11-year period, we did 11.5% in US dollar terms per year.”
    — Todd Moss [15:08]
  • He underscores that proper research and trusted brokerage partners are crucial.

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Notable Quotes & Memorable Moments

• On diversification reality:
  • "If you wanted to diversify your portfolio... that's decreasingly true, and really that just leaves Africa as the final frontier."
    — Todd Moss [02:40]
• On shifting Wall Street attention:
  • “There's a general increase in investor interest in Africa, including by some US Pension funds... Even if they're only going to put 1/2 of 1%...”
    — Todd Moss [04:36]
• On the legacy of the ‘Nigerian scam’:
  • “I do think that there is... a reputational risk. There are still a lot of people that when you say Africa, they think Black Hawk Down Somalia... I think that fortunately that view is increasingly a minority view.”
    — Todd Moss [06:50]
• On remarkable market performance:
  • “The Ghana stock exchange is up about 50%. Both the Kenyan and Nigerian stock exchanges are up over 30% this year.”
    — Todd Moss [07:17]
• On scale and liquidity divides:
  • “Nigeria... only has seven companies that would qualify as mid cap in New York.”
    — Todd Moss [09:55]

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Timestamps for Important Segments

• Opening and paper premise – [00:15–01:44]: Introduction to the topic and why Africa is a unique diversification play.
• Global correlation trends and Africa’s lag – [01:44–03:45]: Discussion of how markets are syncing up globally, with Africa as an exception.
• Wall Street awareness and investor outreach – [03:24–04:36]: Who is watching these trends and whether the findings are new for professionals.
• Myths, scams, and changing reputations – [05:18–08:29]: Addressing the “Nigerian scam” stereotype and real performance data.
• Scale, liquidity, and structural barriers – [08:58–12:09]: The practical limitations of investing in African exchanges.
• Individual investing and personal stories – [13:44–16:57]: Moss’s own investment experience and options available for individuals.
• Closing reflection and caveats – [16:57–17:29]: Host’s summary, reminder that this is not investment advice.

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Conclusion

This episode makes a compelling case for Africa as a uniquely valuable frontier for global investors. While the continent's markets remain under-correlated with the rest of the world—offering real diversification benefits—the realities of scale, liquidity, and the practicalities of access limit large institutional investment. Still, for individuals and smaller organizations willing to research and accept the risks, Africa offers both adventure and the potential for significant returns.

The episode’s tone is curious, honest, and occasionally playful, reflecting the complexity and excitement of true “adventure capitalism.”

Transcript

[A]

Welcome to Global Prosperity wonkcast. I'm Lawrence MacDonald. I'm pleased to welcome to the studio today Todd Moss, Vice president and senior fellow here at the center for Global Development. Todd, welcome to the show.

[B]

Thanks, Lawrence.

[A]

We've got a little bit of a sleeper here. This paper snuck out onto the CGD Internet. I'm sure others were aware of it, but I was trolling around and I came across this interesting newly released paper. Nowhere left to stock market correlation, Regional diversification and the case for investing in Africa. I think our listeners did not expect that they'd be coming to CGD for stock market tips.

[B]

Well, you know, the reason that we, that we took it on is because first we were looking at different ways of trying to encourage private investment in Africa and the stock exchanges seem like a vehicle that are currently under exploited. And then we were also looking at, well, what's the relationship, particularly during the financial crisis of 2008, 2009, what are the linkages between developing parts of the world like Africa and markets in Europe and North America? And that's the rub of this paper.

[A]

So there's nowhere left to hide. There's a terrific chart. I think it's your figure two that shows the correlation. As people have sought to diversify their portfolios to manage risk around the world, the markets have moved more and more in sync. And for a variety of reasons we can talk about that's less true of Africa. So it's sort of as Africa is the last place to hide. Is that the nature of the idea.

[B]

Here in a sense? That's right. You know, not that long ago Brazil was considered exotic. But if there was during the financial crisis, if you were investing in Latin America or the big Asian markets, you were getting hammered just like everywhere else. There was nowhere left to hide. And an interesting thing is that Africa did not get hit. So we wanted to look at the correlation of different national stock markets, different regions with the S&P 500 and look at what the trends are over time. And what we found, I thought was pretty interesting one is that we found that all the markets of the world are converging. They're moving more and more in sync every day. And that that's been a pattern that we trace back two decades and that Africa is part of this trend. It's becoming more correlated with global markets. But that Africa is a notable laggard. Notable laggard. It's much less correlated with other markets. We can talk about why that would be. But why this is interesting is that even the Asian and Latin American markets, they're starting to get close to, they're coming close to perfect correlation with Western markets, which means that your diversification gains are diminished. So if you wanted to diversify your portfolio and, and you thought that investing in different countries in different regions of the world was a good way to get it, actually that's decreasingly true. And really that just leaves Africa as the final frontier.

[A]

Now this comes as news to me, but then I don't spend much time thinking or reading about stock markets. But I'm thinking there are plenty of people on Wall street who are paid way, way more than you or I is paid, whose job it is to seek out these kinds of things. They know this stuff already, right? It's maybe it's new in the think tank world, but it can't be new to people who are looking for diversification opportunities full time.

[B]

Well, there are many ways to diversify. It's not just across countries. I think right now you're probably getting much better diversification across sectors. But one of the ways traditionally has been to try to have different regions in your portfolio. I remember when I was, one of the first lessons I got in, in personal financial management was that you would make sure that you have some international in your stock portfolio and a small portion of that could even be emerging markets. So yes, Wall street, there are people scouring for both growth and diversification. And really it's the fast growing emerging markets that are producing the most growth. But that diversification is starting to wane a little bit.

[A]

Have you heard from anybody on Wall street since the paper came out saying, hey, this is interesting.

[B]

You know, I've gotten some calls from folks that are trying to promote investment in Africa and saying, hey, this was really helpful. I haven't heard it directly from investors that said that they were going to start. However, you know, I'm not sure if it was because of this paper. There's a general increase in investor interest in Africa, including by some US Pension funds and other big institutional investors in the US that have really never invested in Africa and are now looking for potential vehicles. Even if they're only going to put 1/2 of 1%, they're still looking for what those vehicles might be. And we are getting those calls.

[A]

We're going to take a quick break. When we come back, I want to ask you why anybody with money would go anywhere near something that might look like a Nigerian email scam. This is the Global Prosperity Wonkast from the center for Global development. I'm Lawrence MacDonald, my guest today is Todd Moss. We're discussing the paper he wrote together with Ross throughout. Nowhere left to stark market correlation, regional diversification, and the case for investing in Africa. We'll be back in a welcome back to the Global Prosperity Wonkast. Todd when we started chatting beforehand, I thought of these email scams. Fortunately, spam filters are better now. Many of us go weeks without seeing one of these things, but then it'll pop up and say, I'm a Nigerian prince and you know, I've been locked out of my fortune and I just need you to send me your credit card number and everything will be well and I'll share the money with you. There's a reputation there, deserved or not, that this is sort of the wild west when it comes to finance. Would investors want to go near something like that?

[B]

Well, I think, you know, actually the advance fee scam emails I've been getting are mostly coming from northern Europe these days, days. But, you know, I do think that there' syour point on the reputational risk. There are still a lot of people that when you say Africa, they think Black Hawk Down Somalia. They think, I don't know, Joseph Conrad or they think Nigerian email scam. I think that fortunately that view is increasingly a minority view and that the business community and the financial community in particular, and is definitely coming around to a different view of what Africa is all about and really seeing some quite impressive returns and wanting to take advantage of those returns. I'll just give you even just so far this year, the Ghana stock exchange is up about 50%. Both the Kenyan and Nigerian stock exchanges are up over 30% this year.

[A]

I want a piece of that.

[B]

Of course you do. Of course you do. The other really interesting thing, that's not a stock stock IPO this year, but just a couple of weeks ago, Rwanda, which most people probably associate with the 1994 genocide, went to the private euro bond market. They went and issued $400 million in private debt. The rate was under 7% and they actually got orders for $3.5 billion. So part of that is that there's a tremendous appetite for high yield, you know, more than 6% yield on debt these days. But it's also, I think, a remarkable statement about how people are viewing countries like Rwanda differently. They're now seeing.

[A]

And Rwanda has a special reputation for being capable, bordering on authoritarian. So I think there's a sense that if Rwanda says they're going to do it, they'll do it.

[B]

I think that's true. But it's still remarkable that you had people willing to put $3.5 billion into a 10 year bond in Rwanda. And it's not just Rwanda. Lots of countries are going back to the Eurobond market and they're really able to borrow money at extremely, extremely low rates.

[A]

So talk about a 50% return in the Ghanaian market. There are some listeners out there say, okay, I'll take a look at this. You very helpfully in the last pages of this short paper, talk about some of the constraints and risks to this. And the first of it, or one that stuck in my head, I guess it is the first one is scale. Some of these markets are really tiny.

[B]

Yeah, I mean that's the big, the big thing is that these economies are relatively small and these stock exchanges are relatively small in terms of market capitalization. So South Africa, very big exchange, been around since the 19th century, but after that it falls off quite quickly. The Nigerian stock exchange is the next biggest that gets a lot of attention. I think market cap is around $65 billion right now. But in the US we categorize stocks as small cap, micro cap, mid cap and large cap. Well, a mid cap, which is like a mid sized company, has a stock market capitalization of between 2 and 10 billion dollars. So Nigeria may be the second biggest exchange in Africa, but it only has seven companies that would qualify as mid cap in New York. So if you are a large institutional investor, there are very few companies where you're going to be able to buy large blocks of stock. And if you're looking at 5, 10, $15 million blocks, you actually have a very limited range of companies. And it might actually take a long time. It's not like it is here where you put in the order and within a few minutes you've got the trade.

[A]

Well, and having bought it, you might not find a willing buyer if you decide to unload it too. It's on the side. The market's very thin.

[B]

Right. There's just not that much liquidity. In fact, the Ghana stock exchange trades in a whole year. It'll trade more. It trades less than New York will trade before they take their first coffee break. Yeah. So it's just a massive, massive difference in scale. But that means that there's a lot of headroom in these markets to grow. There's a lot of potential for companies to list to seek capital on the stock exchange. And you know, when some of the big players are not able to play, that can create opportunities for some of the small and middle players.

[A]

You say that creates opportunities for small and Middle players. But before we started recording, you also said that oftentimes there's a million dollar threshold for getting into some of these markets. I misunderstood that maybe.

[B]

Yeah. So there are different vehicles.

[A]

These are for some of the funds, these hedge funds.

[B]

Correct. If you wanted to invest in some of these markets, you could do it yourself. I've done that. It works. Or you could, if you're an institutional investor or you don't want to pick your own stocks, you could invest in one of the boutique funds that is an African regional fund or a frontier market fund that might invest in these markets. Those tend to be hedge fund structures which have very large minimums, sometimes a million dollars. And so that's not always accessible to your average retail stock investor.

[A]

We're going to take our second break. When we come back, I want to hear about your experiences as an individual investor in African stock markets. This is Lawrence McDonald from the center for Global Development. We'll be back in a welcome back to the Global Prosperity Wonk cast. I'm Lawrence McDonald. My guest today is Todd Moss, senior fellow and vice president here at cgd. And we're talking about investing in Africa as a diversification strategy for global investors. The fact that Africa's markets are the least well correlated and therefore a very good diversification strategy. Todd's also been tempting me with stories of very, very high returns. Getting into these markets is hard for big institutional investors because they're small and they're liquid. But they sound like they're hard for individuals as well, certainly people of modest means, because if you want to get involved in a hedge fund, you might need to have a million dollars to invest. Not many of us have that. But you can go straight to the market, I gather. And Todd, before we started, you told me something I should have known that your first book was called Adventure Capitalism. It sounds like that's what you're engaged in here in Africa. It's adventure capitalism.

[B]

That's right. So, you know, for people that do want to invest, if you are talking a million dollars plus, it makes sense for you to do your homework and find one of the specialized funds that have done very well. There are not a lot of them, but there's a good handful to choose from and they've got track records. And really they've gotten to know these markets pretty well and they've done very, very well for their investors. If you're not in that million dollar plus category, you could the easiest thing you could do is look at a handful of companies, African companies that are actually listed through GDR and ADR in New York. So there's some of the Nigerian banks are listed in London or New York and you could access those. There's not that many to choose from.

[A]

I'm a little familiar with that. From the early days of China investing.

[B]

Exactly.

[A]

Because the Chinese markets opened, you could buy Chinese shares in New York.

[B]

Exactly. Those are called ADRs or if they're in London and they're called GDRs. But you could also, if you wanted to really be adventurous, open an account with a stockbroker in one of these markets or many markets. When I was doing research for my PhD and for the book that you mentioned, this was in the late 90s, I opened accounts in six countries and I got about a dozen friends. We each chipped in $2,000 and we pooled our money in an investment club and we invested across these markets and we had some wild rides. We had a couple do really well. We'd had a couple completely go to zero and delist. But over an 11 year period, we've now closed the fund. 11 year period we did 11.5% in US dollar terms per year. So sometimes you had to hold on. But it was also not enough money that anyone cared. We did it as a learning, as a learning exercise. And I just saw actually on the web this week that Kenya is going to launch an online trading platform so people could do that. I still hold some shares in Botswana. The Botswana Stock Exchange works as efficiently as any that I've ever invested in. Stockbroking firm works very well. In fact, in the whole exercise of investing in these markets over 11 years, in only one case did we have a bank or brokerage actually appropriate our funds. And it turned out that it was the British bank in London that said we didn't have enough activity. So they took all of our money and we had to go and fight to get that cash back. So, you know, the idea that, you know, the markets are volatile, I don't want to downplay that, but I do think if you choose reputable brokerages and reputable banks, that you really have very little to worry about.

[A]

Well, you've certainly whetted my appetite. I'm notoriously unsuccessful whenever I dabble. So I tend to put my own money. And maybe this is the point to say that CGD is not offering financial advice to any anybody. I tend to put mine into an index fund and leave it alone and forget about it. But if you've got the appetite for risk and high risk means high reward, then I encourage you to look at Todd's papers and if you are really bold, maybe to consider investing directly in these African markets. Todd, it's always a pleasure. Thanks for joining me on the show.

[B]

Great. Thanks, Lawrence.

[A]

This has been the Global Prosperity wonkcast from the center for Global Development. My guest today is Todd Moss, and we've been doling out financial advice to our listeners on how they can lose their shirts or make a bundle by investing in Africa. You can find the wonk cast online on itunes or on Stitcher. Just search for wonkcast or CGD and subscribe to hear a new interview every week. Until next time, I'm Lawrence MacDonald. Thanks for listening.

[B]

Sam.