Tuesday, October 11, 2011

Investing in Africa: All to Play For

Just five years ago nobody would have described Africa as a safe haven. But as accepted safe havens such as the US and European government bonds and equities continue to provide disappointing returns — and the prospect of far worse than that — global investors have been forced to cast their nets wider.

Some of the obvious destinations, such as the popular Bric quartet of Brazil, Russia, India and China, are looking expensive now, though there have been opportunities for quick- witted investors to buy in recent market dips, particularly in India.

SA has been one of those pricey emerging markets, upheld until mid-September by a strong rand.
People in search of high returns now have to look at what are termed frontier markets. These include many countries on several continents, such as Africa’s Nigeria and Kenya, South America’s Argentina, Europe’s Romania and Central Asia’s Kazakhstan.

It should be as natural for SA investors to invest elsewhere on the continent as it is for the British to invest in mainland Europe or Americans to invest in Canada and Mexico, but it is not.

The legacy of the apartheid years means Lagos and Nairobi remain far less known to SA fund managers than London, New York or Hong Kong. SA pension funds can now invest a further 5% of their assets in the rest of Africa, on top of the 25% overseas allowance, but few have taken up the offer. There are some structural issues that make it difficult (see page 36), notably the lack of liquidity in all African stock markets other than the JSE itself.

Eric Kibe, who manages Sanlam’s African Frontier Markets fund from Nairobi, Kenya, says African markets have taken a beating over the past three months. “But this has been due to factors outside our control. The risk appetite of international investors has been reduced because of the threat of a double-dip recession in the US.”

Nothando Ndebele, head of sub-Saharan African research at Renaissance BJM, says that 40% of Africa’s GDP is made up by agriculture yet it is hard for a global fund manager to invest into this sector. “There are parts of the Democratic Republic of Congo that are so rich they can grow three crops a year.”

Mark Mobius, chairman of Templeton Asset Management — once called the Indiana Jones of emerging markets — says that investing in the second tier (the frontier markets) is worth the effort.
In Africa markets are at different stages of development, ranging from Zimbabwe, which opened its first stock exchange in 1896, to Angola, which has a spanking new stock exchange building but no listings yet. Brian Mugabe, head of Africa research at Imara Securities, says SA is the outlier as it is struggling to grow at 3,5% — half the rate of the rest of the continent.

“Angola is growing even faster than the rest so you can appreciate how much excitement the listing of a blue chip such as Sonangol, the national oil company, would create.”

Plus the jobs created for firms such as Imara to trade shares at a generous commission.
Investor relations are also starting to become more professional across the continent, and most listed companies now look to the Big Four auditing firms, plus a few reputable cottage firms such as Grant Thornton, to audit their books.

Nigeria is one of Goldman Sachs’s “next eleven” countries — those it considers to have the potential to become economic giants along with Egypt. (SA didn’t even make the cut.)

“Frontier markets, generally, have companies that are oriented towards their respective domestic economies rather than the global economy, so we believe that they have less correlation to global issues,” says Mobius.

He says Templeton, an early adopter of new markets, is looking at lesser-known economies such as Nigeria, Egypt, Kenya, Botswana, Ghana, Morocco and Tunisia. But though markets in some African countries are developing quite rapidly, they have a long way to go before their potential is fully realised, he adds.

Meanwhile, private equity investments present an alternative channel for direct foreign investment , and private equity companies are looking more closely at the continent . Carlyle, one of the big three global players, recently set up offices in Johannesburg and Lagos.

Within a generation there will be 1,5bn people in the whole of Africa, and China’s population will be in decline.

Ndebele says that financial services will become more sophisticated. There is already a large banking sector in Africa, which dominates most stock exchanges, but very little mortgage finance, while short-term and life insurance are both at an early stage in their evolution.

Though the African Union is not held in high esteem by the outside world, and does not seem to have done a great deal for unity, there is a greater realisation among Africans that economic and political co-operation is necessary and will further the national objectives of all countries on the continent.
Still, there are a lot of negatives , and SA is by no means immune to these.

Ndebele says that in many African capital cities, power cuts are a regular feature. The power infrastructure is awful, she says. “We hear that hydroelectric power is the answer, until the next drought.”

Porous borders and corruption affect SA, but it does not have one of the violence- prone governments that still rule by force on much of the continent. As we know, this has led to poverty and the deterioration of health among segments of the population in certain areas.

But there are some positive developments. Reforms are moving ahead and market economies have been growing and prospering in a number of countries. Ghana, the first in Africa to win its independence, back in 1957, is now, after several false starts, one of the best examples of this. Even blighted Rwanda has had two successful new listings this year.

Mobius argues that the long-term outlook for the continent is bright: “With its substantial wealth in natural resources such as gold, oil, platinum, iron ore, copper and large areas of arable land, Africa is well placed to benefit from increased growth and higher demand in emerging markets such as China and India.”

In 2010, Anand Sharma, India’s minister of commerce & industry, announced that his government planned to invest US$1trillion in Nigeria and other parts of Africa during the next decade.

In Angola, Nigeria and Ethiopia, rapid economic growth has resulted in better living conditions, lower child mortality, higher primary school enrolment and greater access to clean water.

The headline numbers on economic growth are compelling.

The continent, outside SA, is expected to grow more than 7%/year in the next 20 years, due to an improving investment environment, better economic management and China’s rising demand for its resources. SA, if it is lucky, will grow at about half that rate.

More than 100 African companies elsewhere in Africa have revenues in excess of $1bn. Africa also has impressive stores of potential resources, not only in minerals but also in food — 60% of the world’s uncultivated arable land is found on the continent north of SA.

The Bric countries have shown heightened interest . These emerging countries need resources and are willing to invest in infrastructure, which will help African economies.

It sometimes looks as if China may be trying to take over all the plum resources . Mobius says Chinese investments in Africa were subjected to intense media scrutiny in the past, but it only accounted for 2,6% of Chinese outbound investment . More than 70% of its outbound investment was still within Asia in 2009, while 13% was in Latin America.

According to an Ernst & Young survey of African investments, China was one of the top five foreign direct investors in just two sub-Saharan African countries, Ethiopia and Zambia.

Increasingly, Africa is not seen simply as a resources play. The most valuable shares on the exchanges are subsidiaries of the multinational consumer companies such as Unilever Ghana, Heineken’s Nigerian Breweries and Diageo’s East African Breweries.

The big disappointment recently has been Vodafone’s Safaricom, by far the largest IPO in Africa over the past five years. That was mainly because its margins were cut to the bone after a price war with Bharti Airtel.

The demographics are also favourable for growth. No less than 45% of the 1bn -strong population on the continent as a whole is aged between five and 24.

“The rising number of Africa’s youth could have vast potential, if they improve their education and skills. They could be a great asset to drive and sustain the continent’s growth and development ,” says Mobius.

The growing population is by no means an unmixed blessing.

The World Bank estimates that enrolment in secondary education in Africa is between 20% and 35%, compared with 40% in East Asia and 55% in Latin America.

And it is worth remembering that Africa (including SA) accounts for just 1,8% of world GDP — by 2015 it will have crept up to 2,4%. Australia’s share of world GDP will be similar.

GDP per capita in Africa, including SA, will still be only 40% of East Asian levels , though at independence in the 1960s this continent had a higher per capita income than Asia. In 1960 Ghana had a higher income per capita than South Korea.

It will take years to erode the perception that Africa is not a go-ahead continent.

Source: Financial Mail