Fundamental Thinking featured image

The Democratic Republic of The Congo Could Be the Next Big Frontier Market, Eventually

The Democratic Republic of the Congo, which has abundant natural resources, rich farmland, and the powerful Congo River, has the potential to become the renewable-energy hub for the entire world and Africa’s breadbasket. I toured Kenya and the DRC in July on a trip organized by Nairobi-based Equity Bank, which operates a subsidiary in the DRC. As an analyst of frontier-market companies, what I saw intrigued me. The DRC is a nation with vast potential, as well as significant hurdles to overcome.

The possibilities are mind-blowing. The DRC, with a population of 112 million and situated almost precisely in the middle of the continent, is the second-largest country in Africa by landmass and the 11th largest in the world. The Congo River, which winds through the country and is the second largest in the world by discharge volume, has the potential to produce 100 gigawatts of clean electricity, of which less than 3% is currently being harnessed.

With the river and its tributaries coursing through the countryside, the DRC has an estimated 80 million hectares of arable land, enough to produce food for two billion people. The DRC also has abundant mineral resources. A recent UN study estimated its untapped mineral reserves were worth US$24 trillion. The DRC holds 46% of the world’s cobalt reserves, 23% of the world’s lithium reserves, and 4% of the world’s copper reserves. These are all commodities essential in the effort to enable the global transition to green energy.

Portfolio Manager and Analyst Babatunde Ojo, CFA, at a Somika mine in Lubumbashi Katanga, Democratic Republic of the Congo.

That potential is attracting companies like Equity Bank, the largest bank in Kenya. The company has acquired two DRC-based banks in recent years, which now comprise 30% of its total assets. Equity Bank is early to the DRC, but we expect to see more investments flow to the country in the coming years. It is barely scratching the surface of what it could become.

Decades of autocratic rule and corruption have kept the country from tapping its potential. Beginning with Mobutu Sese Seko in 1965, the DRC was marred by wars and political instability under a series of dictators. Because of that, the country’s economic development has been weak, even by African standards. Ranked by GDP per capita, it is one of the poorest nations in the world. The entire country produces only about 3,000 megawatts of power, leading to constant shortages. Less than 10% of the country’s arable land is currently being farmed, making the country dependent on others for food. Only 6% of the population have bank accounts.

The DRC’s financial infrastructure is bare bones. Equity Bank’s DRC-based subsidiary, Equity Banque Commerciale du Congo (BCDC), is the largest bank in the country in terms of bank accounts but has only 1.9 million clients. And the DRC effectively has no capital market; there aren’t markets for government or corporate equities or bonds, which results in a low savings rate, deters economic growth, and makes the economy less efficient.

The physical infrastructure isn’t much further along. Simply generating power is a challenge; energy shortages are regular and severe. Somika, a mining company in Lubumbashi, the DRC’s second-largest city, provides its own electricity with diesel-powered generators, making energy and logistics the areas of some of its biggest challenges and costs. The result is that, despite having some of the highest grades of copper and cobalt in the world, local mines are not cost-competitive compared to mines in Australia.

Today, the DRC is addressing those and other issues. There’s been political stability since the 2018 election of current President Felix Tshisekedi. Working with developmental partners such as the United Nations, the World Bank, and the International Monetary Fund, his government enacted key political, judicial, and economic reforms that are beginning to unlock the country’s potential. Tshisekedi has attempted to weed out corruption and bring transparency to the government and the markets; these efforts resulted in a US$750 million World Bank financing package in 2022. His administration has proposed nearly 70 reforms focused on boosting business creation, facilitating property transfers, improving international trade, and more. The DRC’s entry into the East African Community trade bloc, also in 2022, opened access to neighboring markets with a combined 300 million residents and a combined GDP of US$285 billion.

Today, the DRC is Africa’s third-fastest-growing economy. Add its vast natural potential to that fact and you can see why companies like Equity Bank are moving there. That makes it enticing for forward-thinking investors.

What did you think of this piece?

Chinese Companies Look Better than China’s Economy

In 2023, Chinese markets have been roiled by continued trade tensions, slowing economic growth, and deleveraging in the property sector. Despite this difficult backdrop, there are reasons to be optimistic about the growth prospects of some Chinese companies. Portfolio Managers Andrew West, CFA, and Lee Gao discuss their current perspectives on China with Portfolio Specialist Apurva Schwartz, including how they weigh the opportunities and risks of investing in the market.

Slowdown in Economic Growth

Real estate, the biggest source of wealth for Chinese consumers, was in bubble territory and has been slowing for a while. This has negatively affected consumer confidence and household consumption.

India: Four Takeaways from Our Travels

With high GDP growth and a rapidly expanding industrial base, there is a lot of optimism about the Indian economy. And having passed China earlier this year as the world’s most populous nation, there is the potential for a “demographic dividend” to bolster that growth in the coming decades. Recently, three Harding Loevner colleagues traveled to India to talk to companies and see conditions on the ground for themselves. In the video series below, portfolio manager and analyst Jafar Rizvi and analysts Sean Contant and Chris Nealand discuss what they saw on their trip and their perspectives on India with portfolio specialist Apurva Schwartz.

OOOM featured image

Going Home: An Account from China’s “Zero-COVID” Frontline

Prior to COVID-19, Wenting Shen travelled to China regularly to visit managements of current and prospective investments. Round-trip travel to China from the US was impossible during the first two years of COVID-19, but recent easing of US travel restrictions encouraged her to plan a trip. With seats going fast, she snagged one on a flight from Newark to Shanghai for March 30. After three negative PCR tests over seven days at a Chinese-government-approved clinic in Queens, New York, she was ready to fly.

But days before Shen’s departure, new complications arose: outbreaks of the Omicron variant in several Chinese cities, including Shanghai, were prompting citywide lockdowns. The flight was still due to depart, but had been rerouted to Fuzhou, a coastal city across the strait from Taiwan, 450 miles to the Southwest.

The natural—some would say, prudent—decision at this point might have been to postpone her trip. But Shen, worried she might not easily get another ticket, pressed ahead. Here are her travel bulletins.