The Final Frontier

For savvy investors looking to diversify their portfolios, there’s only one place left to go: sub-Saharan Africa.

In popular culture, sub-Saharan Africa may still conjure  images of conflict and poverty, yet investors from Wall Street to Main Street are taking a decidedly rosier view. Africa's surging growth is now well known -- the region is home to six of the 10 fastest-growing economies in the world. "Never in the half-century since it won independence from the colonial powers has Africa been in such good shape," gushed a recent special report in The Economist.

If you had jumped on this bandwagon in 2012, you too would be an Afro-optimist. Investors may be thrilled that the S&P 500 index rose a cheery 13 percent in 2012 and is up another 8 percent this year -- but this pales next to Nigeria's stock market, which spiked 35 percent last year and is up another 18 percent so far this year. Ghana (up 24 percent), Uganda (up 39 percent), and Kenya (up 30 percent) also posted strong showings in 2012, and even longtime economic basket case Zimbabwe is up 20 percent in 2013.

But potentially huge returns are only part of the reason to invest in one of sub-Saharan Africa's budding equity markets. The real play is diversification. As we discovered in our recently released study for the Center for Global Development, African bourses are among the last of a rare and endangered species -- stock markets that remain uncorrelated with the major global exchanges.

Diversification is a basic principle of asset allocation. Few investors want to put all their eggs in one basket, thus risking losing it all in the event of a downturn. By spreading around one's assets in markets that do not move in a synchronized manner, investment risks can be dramatically lessened. However, all this depends on finding markets that move independently from each other.

But an irony of globalization is that as financial markets integrate, they respond to similar events -- and thus the benefits of spreading one's assets across different markets shrinks. These linkages can lead to contagion in times of crisis -- such as Mexico in 1994 or Thailand in 1998 -- when panic in one country can plunge markets into crisis on the other side of the globe.

The old exotic is already the new normal: Traditional emerging markets, like those in Latin America or Asia, are even more strongly correlated with the United States than we expected. The main U.S. and European stock market indices monthly correlation is about 0.9 (with 1 meaning they move in perfect sync), and Latin America is not far behind. The correlation of the S&P 500 with a weighted average of Latin American stock indices reached 0.86 in 2010, up from a meager 0.15 in 1992. That means, when the Dow moves on Tuesday, it's highly likely that markets in Sao Paolo and Beijing will follow suit.

By comparison, Africa's correlation is lagging -- and for once this is gives it an advantage. A weighted index of sub-Saharan markets (excluding South Africa) has a correlation of just 0.31 with the S&P 500, less than half of what we find in Asia or Latin America. Thus, an investor won't be able to diversify his holdings by buying Brazilian or Chinese stocks -- but he would be able to do so by investing in Kenya or Ivory Coast. A savvy investor, who can find quality stocks in these places, won't have to worry much about plunging shares elsewhere hitting these shares.

Furthermore, the lack of correlation among individual African markets provides potentially even greater benefits to a diversification strategy. We found close to zero correlation, for example, between Nigeria and Tanzania or, say, between Ghana and Botswana. That's more good news for smart investors looking to spread their risk by investing in multiple markets.

But the clock for exploiting this anomaly is ticking. As markets integrate, African stock returns are converging with global benchmarks: Their correlation with the S&P 500 was close to zero a decade ago, but has steadily risen. As more investment has moved into Africa, they have become, ironically, more closely in sync with external markets. Fortunately, African markets may not reach total convergence any time soon, but their usefulness as a way to spread around risk is certainly going to continue to diminish. And as African investors start to place their money into neighboring countries, the intra-regional benefits will likely decline as well.

African stocks are not for all investors. Volatility of returns remains relatively high, and liquidity is still shockingly low. Large institutional investors in particular will find it difficult to enter many of these smaller frontier markets, just because of their sheer size. Ghana's exchange, for example, may be posting impressive returns of late -- but the market trades less volume in a whole year than the New York Stock Exchange does by lunchtime. Even finding blocks of shares larger than $5 million can require patience and can exclude some of the biggest players..

But there are a growing number of boutique funds that specialize in the region, which are well placed to manage the challenges. EPFR Global, a fund flow data provider, reports that these funds and others managed by major global banks have already begun pumping money into Africa-dedicated equity funds -- nearly $900 million in December 2012 alone. Just last week, Barclay's South Africa-based Absa Asset Management announced plans for a new $100 million regional stock fund. (If you are a small investor and want to try for yourself, here's's Ryan Hoover's advice for how to start in Botswana.)

African countries can also take steps to better exploit this growing investor interest. The first is, ironically, getting more domestic investors -- it's never a good sign to foreigners when the locals are shying away. In most African countries, the biggest potential investors are their own public pensions, which are often restricted by rules severely limiting stock holding. Relaxing these rules, as Ghana and Nigeria have begun to do, could release a large reservoir of capital and help to build the equity market investor base.

In theory, there's also no reason for countries to each have their own stock market. The economics suggest they should merge into one large regional exchange, sharing costs and boosting overall liquidity. But the political logic runs the other way: stock markets have become important symbols of a modern economy -- the contemporary equivalent of a national airline -- so each country wants to have its own.

As an interim step, markets can encourage cross-listing, which can offer the best of both worlds. This practice is already reaping benefits: The Botswana Stock Exchange, in addition to its 24 local companies, also trades 14 South African-listed shares, which boosts its total market capitalization more than nine times.

The biggest hurdle holding back these markets from further expansion is the limited size of their own host economies. If a country's entire economy is only $20 billion (roughly the gross domestic product of Tanzania or Uganda) or even $35 billion (approximately Ghana or Kenya), then it will likely only have so many private companies large enough to attract big international investment. Even Nigeria, with a GDP of $235 billion and a stock market capitalization of $66 billion, has only seven companies over the $2 billion minimum which qualifies them as a "midcap." But if Nigeria can maintain its high rates of economic growth, this dearth of globally attractive listings won't last for long.

In the meantime, African officials and fund managers seeking to bolster capital inflows should exploit one of the very few advantages of being outside the global economic mainstream by highlighting the independence of its equity markets. In so many ways, the world economy is stacked against small markets and small investors. Here is one way in which the little guys -- at least for now -- can gain an edge.



Springtime for Salafists

Rampaging Islamist vigilantes are cracking down on free expression -- and ruining Tunisia's Arab Spring.

In mid-March, a 19-year-old Tunisian activist named Amina Tyler posted several topless photographs of herself on Facebook. In one pose, the dark-haired Amina is set against a black background, wearing lipstick and eye shadow. She cradles a cigarette in her left hand and stares off camera, with the words "My body is my own and not the source of anyone's honor" written in Arabic across her naked chest. In another iconic photo, Amina stands before a white tile background. Gone is the heavy makeup from the first photograph, and she stares directly into the camera, both of her middle fingers raised. The phrase "Fuck Your Morals" is scrawled on her body in English.

Amina has said that she represented the movement Femen, an organization founded in the Ukraine that hosts topless protests to support women's rights. But this symbolic protest soon took a dark turn: A woman claiming to be her aunt posted a YouTube video disowning her, saying, "I hope she pays for her actions." The Salafi cleric Adel Almi also issued a fatwa warning that Amina's act could "provoke epidemics and disasters," and "give ideas to other women." Almi called for the young woman to be stoned to death. By the end of last week, local media reported that Amina could face two years' imprisonment for posting the photos.

Two related phenomena are important to understanding this incident -- the increasing restrictions on women in Tunisian society, and a significant rise in Salafi vigilantism. Though Tunisia has had one of the most progressive legal systems in the Arab world toward women's rights since its independence, these restrictions have largely resulted from societal pressures and harassment. According to recent media reports, increasing numbers of Tunisian women feel they need to change the way they dress -- including donning the hijab as a protective measure.

The earliest known post-revolution act of vigilantism targeted female prostitutes. Though maisons closes (brothels) have been legal in Tunisia since 1942, Der Spiegel reported that in February 2011, a crowd of "several hundred outraged citizens" gathered near a maison close in the capital of Tunis on a Friday, the Muslim day of prayer, to protest the presence of prostitutes. The protesters came armed with "sticks and torches in hand," but were stopped by both the Tunisian military and "a militia of pimps, porters and day laborers."

An unsuccessful attack on prostitutes, legal or not, might elicit little sympathy from many observers. But those attacks quickly spread, with maisons closes being set aflame in such cities as Kairouan, Médenine, Sfax, and Sousse, while some of the prostitutes "were hunted down and beaten."

Other women have been attacked for far lesser affronts to public morals. In the working class Tunis neighborhood of Intilaka, a street vendor scolded journalist Zeineb Rezgui for wearing a sleeveless summer dress, referring to her as a prostitute. As Rezgui recounted, "I tried to talk to him, but all of a sudden he jumped and slapped me hard on my neck. I fell on the ground, he started kicking me. About five other men, also with long beards, some wearing long tunics, joined him. They were kicking and punching me all over my body. The rest of the people were just watching and nobody dared to approach." Similar attacks on women have occurred in the northwestern city of Jendouba. And though violence targeting women was the first sign, religiously motivated vigilantism rapidly spread to other sectors of Tunisian society.

Tunisia's hardline Salafi movement primarily drives these attacks. Although there are different strains of Salafism in Tunisia, including a politically quietist strain, it is by no means clear that this turn toward vigilantism within the country is limited to the most militant -- those who can be characterized as jihadists. Vigilantism has spread far and wide, affecting a broad spectrum of Tunisian society: Artists, liberal clerics, Sufis, religious minorities, educators, secularists, foreigners, and civil society activists have all been its victims. It is also geographically dispersed, occurring in locales throughout the country rather than being confined to a few areas. And alarmingly, there are several documented instances in which those who carried out the attacks were able to intimidate the security services, thus resulting in police inaction following acts of violence -- or on occasion, causing the government to take legal action against the victim of the violence.

Attacks on the arts

Probably the most critical of these battlefields is the debate occurring over free expression in Tunisian society. The ability to discuss vital issues lies at the heart of any civil society, and an array of Salafi groups have moved to short-circuit the conversation: They have launched attacks and intimidation campaigns against artists whose work they think transgresses the moral standards appropriate for an Islamic society.

One of the earliest attacks on artists occurred in June 2011. Der Spiegel reported that at that time, an art-house cinema in Tunis was planning to show a movie about secularism that many Salafis viewed as heretical. In response, "a gang of Salafists forcibly entered" the theater and "sprayed tear gas and roughed up the management." The cinema has been closed ever since.

Subsequent attacks on artists abound. On April 9, 2011, director Nouri Bouzid -- a director with outspoken anti-Islamist views -- was stabbed in the head by a bearded student who shouted "Allahu Akbar!" (God is great) before delivering the blow. Bouzid fortunately survived the attack, which he attributes to his "pro-secular stands and rejection of [extremist Islamic] culture." Shortly before Bouzid was stabbed, a speaker at a rally organized by the Ennahda movement -- then the country's largest Islamist party and now the leading party in the government -- called for him to be "shot with a Kalashnikov."

An even more striking string of incidents occurred five months later, when the TV station Nessma showed Persepolis, an animated film that many conservative Muslims found blasphemous because it contains a scene depicting God, which is anathema to stricter interpretations of the faith. After the controversy flared up, the head of the station, Nebil Karoui, issued an apology for broadcasting the film. Nonetheless, many preachers devoted their Friday sermons to denouncing Nessma, after which a mob of about 300 people attacked the Nessma studios in an attempt to set fire to them.

This violence was followed a week later by an assault on Karoui's home. As Middle East Online reported, an armed mob of "about a hundred men, some of whom threw Molotov cocktails," laid siege to his house. About 20 were able to get inside. Karoui's family was home at the time, and they barely managed to escape. In a disturbing footnote to these incidents, the government's response was to call for "respect for sacred things," and in May 2012 it was Karoui who ended up being fined by a Tunisian court for "disturbing public order and attacking moral values" for showing the film in the first place.  

Taking control of the mosque and classroom

As Salafis try to leave their imprimatur on the art world, they are also seeking to dominate the discourse in the civil and religious spheres. There have been numerous instances of Salafis showing up in mosques and demonizing the previous imams, accusing them of being collaborators with the old regime. In this way, many members of the old religious establishment have been forced out. Tunisian Religious Affairs Minister Nourredine el-Khadmi said that Salafis now control around 100 of the country's mosques.

One aspect of attempting to control the religious sphere, for Salafi vigilantes, has been targeting Islamic practices regarded as deviant. A Sufi shrine in the small town of Akuda, 85 miles south of Tunis, was set ablaze by Salafis in January -- marking the 35th such attack in a seven month period. There have also been attacks on mausoleums: A Salafi even desecrated the tomb of Tunisia's first president, Habib Bourguiba. 

Salafi vigilantism has also extended to non-Islamic faiths. In September 2011, a group of Salafis occupied the Christian basilica in the northwestern city of El Kef with the intention of turning it into a mosque. Last week, Salafis attacked two Italians and two Tunisians in the southeastern coastal town of Zarzis due to the erroneous belief that they were promoting Christianity.

Education has been another heavily contested area of civic life. In Manouba University, outrage boiled over into violence after university administrators decided to reaffirm the presidential decree, issued in 1981, prohibiting female students from wearing the niqab (face covering) in class. Salafis on campus denounced the ban, and also demanded an end to mixed-sex education. During the course of several extremely contentious months, Salafis briefly took Habib Kazdoghli, the dean of the college of letters, as a hostage.

"Salafists are not letting us do our job. Whenever us professors try to apply the university's law, we get physically attacked," said English professor Radhia Jaidi. "The Faculté des Lettres is no longer a safe environment for us to teach in." During the ongoing dispute, the Tunisian flag was ripped down and replaced by a Salafi black flag bearing the shahadah, Islam's declaration of faith. Other Tunisian universities have seen similar open confrontation between secularists and Salafis.

The Manouba case represents another instance where the victims of Salafi vigilantism were prosecuted. Kazdoghli had a confrontation with two veiled female students in March 2012. He told Der Spiegel that they "loudly demanded that they be allowed to attend lectures," and one of them angrily swept the papers on Kazdoghli's desk onto the floor. He and his staff "forcibly removed the two furious women," after which they sued him for assault. The trial has served as a lightning rod in Tunisia's still-emerging culture wars, with about 100 activists rallying outside the courthouse to support Kazdoghli in late November.

Another sphere that Salafi vigilantes have attempted to control is that of private vice. There have been numerous attacks on hotel bars and alcohol vendors. In one September incident, for example, about 50 activists burst into a bar in Sidi Bouzid's Hotel Horchani, where they smashed bottles and chased customers, while yelling "al-saharab haram" (drinking is a sin). "A young man who tried to film the raid was beaten by members of the group and taken to an unknown location," AFP added.

A final category of attack has been aimed at civil society activists -- those who are most likely to present an alternative course for Tunisia. A harrowing letter that Human Rights Watch sent to the Tunisian interior minister and justice minister last summer documents these assaults. Rajab Magri, who was part of a group that disrupted the aforementioned Salafi occupation of the basilica in El Kef, reported that he was targeted by Salafis thereafter -- first on Facebook and then in person. In May 2012, a number of salafi activists ambushed him in an El Kef street. "They started kicking and punching me all over my body, they grabbed me by the hair and started hitting my head on the pavement," he reported. "I was almost unconscious. They were insulting me, calling me a kafir [infidel] and shouting that they will kill me."

Other activists had similar stories. Jaouhar Ben Mbarek, a spokesman for the secular political list Doustourna, recounted how Salafis vilified his party's activists on Facebook after they began planning a series of meetings in southern Tunis. The war of words culminated when a Dostourna meeting in a southern village was attacked by 40 to 50 bearded men. "They started beating people in the room at random, throwing chairs at people, and kicking them," Ben Mbarek recounted. "When they saw me, they left everybody else and rushed towards me. They surrounded me, and started kicking me. Two of them forced me to kneel, someone grabbed me by the hair and shouted, ‘where is the knife?' as if he wanted to slaughter me."

The police response

During much of this period, the police response to acts of Salafi violence has been tepid at best. Human Rights Watch has reported on police inaction following multiple attacks: In Magri's case, police took no action after two separate assaults, and one police officer told him that they could not arrest one of the attackers because "his emir threatened to set the city on fire if they do."

Zeyneb Rezgui, the female journalist who was attacked in Tunis, reported a similar explanation for police inaction. A police officer said that her attackers "threatened him and vowed to burn his house and kill his family if they did anything against him."

In one sign of the security forces' belief that they lack the upper hand against Salafi vigilantes, Tunisian security forces held a rally in November denouncing attacks against them. Algeria's El-Watan reported that they demanded more equipment, as well as "instructions enabling them to use all means necessary when they are attacked."

Some believe that the government is not helpless to stop extreme Salafism, but rather that the ruling Ennahda Party is purposefully turning a blind eye toward it. The murdered opposition figure Chokri Belaid adhered to this view, accusing Ennahda of "giving the Salafis a free hand, and enabling them to climb the pulpits of mosques." Such views are bolstered by a leaked video of Ennahda leader Rached el-Ghannouchi meeting with Salafi elements, where he appears to offer them sympathetic strategic advice. Activists who have left the party leveled similar accusations: MP Fattouma Attia remarked that Ghannouchi's ideas "are not convincing, especially in regard to Salafists," and said she wonders "if he is not a Salafist, or maybe intends to use them for electioneering purposes."

The less conspiratorial view is that former President Zine el Abidine Ben Ali's regime was so repressive that the current government is extremely hesitant to duplicate his methods. Ghannouchi articulated this view, stating at one point that if the Salafis were demonized, "in 10 or 15 years they will be in power."

It is possible that Tunisia's stance toward violent Salafis reached a turning point following the September assault on the U.S. embassy in Tunis, which was instigated by the Salafi jihadist organization Ansar al-Sharia Tunisia. In clashes that killed two people, protesters managed to force their way past riot police and into the embassy, where they threw petrol bombs and ransacked the compound. Thereafter, the government finally undertook fairly sweeping arrests of some Salafist elements. This resulted in a hunger strike among detainees, in which two prisoners died.

But even if the country has reached a turning point, there is no guarantee that the wave of vigilante violence is gone for good. Over the long term, non-state violence can intimidate activists and artists who do not share this extreme religious worldview, and erode citizens' faith in the government's ability to maintain order. There is already evidence that that the tactic is enjoying some success: Vigilantes have been able to quietly obstruct a large number of performing arts events.

Ultimately, whether or not Tunisia takes a more religious turn -- even an extreme one -- will be decided by the Tunisians, and not by outside powers. But the United States and other countries have expressed their dedication to bolstering Tunisian civil society, and part of their commitment to doing so can come in the form of following up with authorities to ensure they are prosecuting Tunisia's vigilantes. If the government looks the other way, or if police are too intimidated to make arrests, then the extremists will have won an important battle in the struggle for Tunisia's future.