Friday, May 13, 2011

Sven Richter of Rennaissance Capital on Africa

Financial Mail interview with Sven Richter, head of Frontier Markets, Rennaisance Capital:

What brings you to SA?

We have US$130m invested in Africa out of the $2,5bn managed by Renaissance. We have recently opened our third office, in Johannesburg, to complement our offices in Moscow and London. I will be managing a frontier market fund, which we will launch later this year, and I expect that African shares will make up about 50% of the fund.

So you are positive on Africa?

Compared with emerging markets in Asia the stock markets are cheap. And the fundamentals are good. Not many people know that there are more households earnings $20000/year or above in Africa than in India. Nigeria is expected to be one of the 20 largest countries by GDP in 2020.

What about stock market liquidity?

You might remember the New Star Heart of Africa Fund, which was unable to sell its underlying shares fast enough to meet redemptions in 2008. We want to avoid such a crunch in our sub- Saharan African Fund, which excludes SA. The JSE trades about $1bn/ day, the other African markets in aggregate trade $40m on a good day. Even if that increases to $100m over the next few years the fund needs to be capped at $300m so that we can be confident that the portfolio can be sold in 10 days.

What about the prospects for African unity?

I am not expecting the African Union to drive this. But it could develop from the three economic unions which represent the east, west and south of the continent. Improvements in ports and infrastructure will also help drive African development. Until now, it was more cost-effective for Nigeria to import sugar rather than bring it down from the north of the country to the coast. But as road and rail links improve, the economics of using Nigerian sugar have improved.

As Africa is 53 different countries it must add complexity.

Of course it does, but it is also a mistake to see China as one country. The contrast between rich coastal cities such as Shanghai and the underdeveloped interior is as stark as anything in Africa. There are parallels between Africa today and China a generation ago.

What companies are best placed to benefit from the emergence of Africa?

As in my days in the Templeton emerging markets team I like the consumer shares. Breweries are still a great investment. Telecoms are getting expensive and probably won’t show the growth they did in the past. Bank shares are a better way to access the consumer and there are a lot of them. Financials make up 58% of the fund.

What about natural resources?

Very few natural resources shares are listed in the region. Energy and basic materials make up less than 2% of the benchmark. Most of the listed companies in the African resources sector are listed in London, Sydney or Toronto. About 5% of our portfolio is listed in Western markets.

So what are your main stock picks?

Though it needs more rain, Kenya is looking stable macro economically. The two largest shares are Kenya Commercial Bank and its competitor Equity Bank. There are five Nigerian banks, with the largest holding in Access Bank; two Nigerian brewers; and New Mauritius Hotels, which manages 25% of the hotel rooms in Mauritius.

And does your fund invest in Zimbabwe?

Yes. There are some cheap, well-run businesses, some of which have externalized the bulk of their business, such as Seedco, a world leader in the seed business. Innscor is an excellent broad-based consumer business with a leading position in retail, milling and snacks. Other great businesses are the brewer Delta Corp and Econet, the cellphone business.