Forgotten Continent

By Patrick Donley, Matthew Gutierrez, and Shawn O'Malley, edited by Robert Leonard · December 27, 2022

*LinkedIn newsletter is posted at a one-day delay.

Well, markets welcomed investors back from the holiday weekend with a quiet start to the final week of the year. 

Stocks were mostly lower to kick off the holiday-shortened week. 

China-linked stocks rose as the country loosened Covid restrictions. Tesla shares continue to tumble, with the stock on pace for its worst year ever (down nearly 70%) 

The S&P 500 is on its way to its first annual decline since 2018 and its worst performance since 2008.

Here's the market rundown:

MARKETS

*All prices as of market close at 4pm EST

Today, we'll discuss two items in the news: Why 2021's SPAC boom is ending in a frenzy of liquidations, and the big changes coming to Americans' retirement accounts, plus our main story on an entire continent that most investors overlook.

All this, and more, in just 5 minutes to read.

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IN THE NEWS

😵  SPAC Boom Ends in Frenzy of Liquidation (WSJ) 

Explained: 

• During a boom in so-called "blank-check companies," aka special-purpose acquisition companies (SPACs), their creators couldn't launch them fast enough to draw in abundant investor capital to acquire private companies. Now, they're rushing to liquidate these shell companies in an ugly conclusion to the controversial frenzy that defined 2021.
• With few prospects for attractive deals, SPACs are closing at a rate of roughly four a day this month, as over seventy have liquidated and returned capital to investors since December 1st. It's believed that there are still around 400 SPACs wielding, in aggregate, $100 billion of capital, which is typically stored in ultra-safe short-term government bonds until a deal is found.
• SPAC creators have lost over $600 million on liquidations this month and more than $1.1 billion this year. However, for the most prolific SPAC launchers, such as venture capitalist Chamath Palihapitiya, recent losses pale in comparison to their gains from last year.

Why it matters:

• Falling stock prices and rising interest rates have nearly frozen the market for new public listings, making it challenging for SPACs to meet their two-year deadline for finding a private company to acquire and bring public. 
• Additionally, the glut of private firms that went public in 2021 to capitalize on market highs has reduced the pool for remaining attractive businesses to acquire.
• A new 1% federal tax on share repurchases is also expediting the SPAC liquidation process. Future wind-downs that return cash to investors could be considered a share repurchase and be subject to the tax. 

 📁  Big Changes Expected for Retirement Plans (WSJ)

Explained: 

• Congress is on the verge of passing a bill to help Americans save more for retirement and leave savings untouched for longer. This comes in a year where sharp inflation has damaged many people's financial outlooks. 
• The plan would raise the age required to begin withdrawing money from tax-deferred retirement accounts to 75 (by 2033) from 72 while also enabling older workers to make larger "catch-up contributions" to these retirement accounts.
• Roughly half of American households aren't saving enough to sustain their living standards in retirement. Rocketing everyday living expenses aren't helping with this, either. Eggs and margarine rose almost 50% from last year, on top of 25% increases in flour and baking mixes, and prices at sit-down restaurants are up 9% — overall, consumer price levels are up around 7%. 

Why it matters: 

• One aspect of the bill would require newly created 401(k) and 403(b) plans to automatically enroll workers starting in 2025 at contributions between 3% and 10% of their pay. Additionally, the legislation would remove legal barriers so employees can use 401(k) plans to save for emergencies, up to $2,500 in a "rainy-day" Roth account. 
• These emergency savings could be tapped free of taxes and the 10% penalty normally made to early withdrawals. Similar withdrawal exceptions would be made for the terminally ill, victims of domestic abuse, and those impacted by federally-declared disasters. 
• The bill hopes to reconcile today's rising prices and longer lifespans with outdated retirement account rules. These provisions would potentially boost flexibility for Americans and increase retirement savings across the wealth spectrum. For example, $1,000 tax credits would become available for certain low-income workers that, starting in 2027, could be directed toward retirement accounts. 

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THE MAIN STORY: A FORGOTTEN CONTINENT

Overview

With 2022 winding down, the question is, where will the best investing opportunities be next year?

We expect inflation to moderate but still prove persistent and elevated compared to pre-pandemic norms. This means that the cost of capital will be higher as interest rates also remain comparatively high. 

In such an environment, with companies facing financing challenges globally, where do the best returns on investment lie?

Well, the obvious answer is to go where capital is in the lowest supply.

In other words, go where the money isn't. Without question, that's in Africa.

Hidden potential

This is undoubtedly a proposition you rarely hear discussed, as global investors brush over the entire continent more than anywhere else. At least, until this year.

That's right, despite the traumatic year most of us have experienced in our portfolios, some African countries are raking in new investments.

Although the region is notoriously difficult to deploy capital in, glimmers of hope are beginning to emerge. For geopolitical strategist and economist Dr. Pippa Malmgren, Africa is the obvious answer to our question at the top of this piece. 

She says, "(Africa) is poised to be a place we'll all wish we'd figured out how to be a part of its successes a decade from now." 

In perspective

Given that Africa is a continent of 54 countries and more than three times the size of the United States, let's be specific rather than generalizing such a large and diverse collection of cultures, economies, and geographies.

In this vein, Malmgren encourages us to consider Rwanda. In just a few years, the country has moved on from its reputation for brutal genocide to now being known as the "Singapore of Africa."

During this time, Rwanda has cracked down on corruption dramatically, with Transparency International calling it the least corrupt country in East Africa in 2017.

Malmgren says that Silicon Valley spin-offs have increasingly found homes here, given its inviting policy environment and substantial pool of skilled computer programmers.

Firms like Hence.ai use Palantir operating systems to support lawyers worldwide in managing customer relationships. 

Promising future

While the rest of Sub-Saharan Africa grew at 2% GDP rates before Covid, Rwanda's economy bounced ahead at a 14% rate.

The country has even signed agreements enabling it to tap into satellite-based wifi systems to provide connectivity for its people, according to Malmgren. Shockingly, only 35% of Africans have internet access.

The potential for growth as space satellites revolutionize the continent's capacity to innovate and engage with the developed world is profound.

The opportunities aren't just confined to Rwanda, either. 

Opportunities abound

Kenya raised over $1 billion in venture capital funding this year, a 400% jump from 2021. This is particularly impressive given the hesitancy to take risks with rising interest rates and a slowing global economy. 

The first African "unicorn" (a business to reach a $1 billion valuation) to launch on the New York Stock Exchange was Jumia (JMIA), which some call the "Amazon of Africa."

Malmgren argues that we should expect a flurry of burgeoning African businesses to list on American exchanges and raise capital there in the coming years. 

This comes, in part, as the continent takes major steps towards making itself more productive. In January 2021, the world's biggest free trade zone was established: the African Continental Free Trade Areas.

Relations and resources

Elsewhere, countries like Morocco maintain close European ties, evidenced by a new deal with Spain that enables the passage of normal passengers and goods at sea and land crossings.

On top of this, several countries in the region preside over vast resources. 

Niger, for example, holds 5-7% of the world's highest grade uranium, while Mali alone has over 4 million tons of lithium, a metal critically important to batteries and electric vehicles.

International interest

As Africa's role in the global economy is poised to grow, Malmgren emphasizes that the U.S., China, and Russia are at odds trying to buy influence. 

President Biden's administration has launched a global infrastructure and investment partnership that intends to dole out $55 billion now, with the possibility to "mobilize $600 billion by 2027."

Much of this capital will surely be directed toward African economies.

She encourages us to "think about what African capital markets will look like in a decade. I believe that there'll be enough good stories and success to warrant time and attention today."

Takeaways

For individual investors, garnering significant exposure to Africa's potential directly is challenging and risky. 

However, it may be wise to keep an eye out for these companies as they come public in markets around the world since African exchanges typically lack the capital and infrastructure to support their growth, as compared to the U.S. and Europe. 

Dive deeper

You can find Dr. Pippa Malgren's full post here for more context.

To learn more about opportunities in Africa, check out this 2020 podcast by our founders, Preston and Stig. 

SEE YOU NEXT TIME!

That's it for today on We Study Markets! 

See you later!

All the best,

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