With so much attention on emerging markets in recent years and many approaching developed status, investors are seeking a new generation of developing countries.
Africa certainly fits that bill – particularly the sub-Saharan area – and advocates have branded it the final investment frontier.
Among specialist investors, Charlemagne’s Sharat Dua, who runs the group’s Magna Africa fund, says the continent is at an exciting stage for investors, with strong fundamentals largely ignored by the Western world.
‘Such antipathy is clear from market behaviour. Despite rapid growth in economies, urbanisation and working populations, African equities were among the first to sell off as risk appetite evaporated in the face of eurozone debt problems,’ he says.
According to Dua, the balance of Western reporting on Africa is usually skewed to the negative. Of 21 countries that had elections in 2011, including a peaceful transfer of power in Zambia, few that went smoothly received widespread attention, he says.
On the brink
Africa is not a homogenous region, and has countries at different stages of economic and political development. But Dua says it is possible to contrast its many growth stories with sluggish prospects in the West. ‘Many so-called developed economies are structurally weak, with ageing populations deleveraging after years of living beyond their means,’
‘In Africa, there are already around 60 million middle class households – with an annual income above $3,000 (£1,800) – and this is expected to reach 100 million by 2015. Its working population is also predicted to be the largest in the world in the next 20 years, with a current median age of 20 against 40 in Europe and 30 even in Asia.’
Recent analysis from the World Bank puts Africa at a similar stage to India 20 years ago, highlighting the continent as on the brink of economic take-off.
‘Critics see the continent as a purely a commodity wealth story and while this is a key theme, the more important factor is how it trickles down into the wider economies,’ says Dua. ‘Politics is the one area where change is not so rapid but things are improving. It is vital that governments continue to use commodity wealth for infrastructure and creating jobs, which will bring more people into the real economy as consumers.’
In Magna Africa, he favours South Africa, both for its own fundamentals and as a way of playing the continent as a whole. Nigeria is another popular area, with Dua highlighting ongoing developments there despite the largely negative portrayal in the West.
Earlier this year for example, the government announced an end to fuel subsidies, which meant Nigerians paying market price for their petrol, from 65 to 140 naira (26p-56p) per litre. This led to protests and strikes for a period, before an eventual compromise level of 97 naira, with a promise of fully unsubsidised prices in due course.
‘Western commentators focused on the government losing control but this ignores the brave measures they are taking,’ says the manager. ‘Despite being a huge oil producer, the country – through a lack of foresight – is a net importer of refined petroleum and the subsidy costs $8 billion a year, more than the amount spent on healthcare, education and housing combined. This is unsustainable and also widely abused by petroleum traders, who buy subsidised fuel to sell outside Nigeria.
‘Ending the subsidy is necessary and we applaud president Goodluck Jonathan for taking unpopular short-term measures for longer-term good.’
Elsewhere, Fidelity is overweight Europe Middle East and Africa (EMEA) in its Emerging Markets fund, with African exposure key.
Mark Livingston, an investment director on the EM team, says the team’s quality focus leads them to countries like South Africa, where companies have the best corporate governance in the emerging world.
Looking at themes in the portfolio, the consumer is key, both in Africa and China.
Livingston notes opportunities in countries such as Nigeria, which is benefiting from powerful shifts in consumerism, albeit from a low base. GDP per capital has quadrupled since 2000, from $400 to $1,600, and the population has risen from 120 million to 165 million in the same period, creating huge demand for lower-end goods such as basic food and drink.
‘We like companies such as South African supermarket business Shoprite, which is taking advantage of its geography to extend across the rest of the continent,’ says Livingston.
‘The issue is very much supply rather than demand-led in these countries and once you have a distribution network set up through supermarkets, this is an extremely profitable business. Shoprite is not a large active position in the fund now as the valuation has caught up with reality but the underlying consumer trend is clear.’
Nigerian Breweries, a subsidiary of Heineken, is another favoured stock in the consumer area.
Emerging market veteran Mark Mobius also highlights growing opportunities in Africa, recently launching a dedicated fund for the region. The executive chairman of Templeton Emerging Markets Group says that the population of Africa has seen its prospects and productivity transformed by education, mobility and access to capital resources.
‘The effects of this virtuous circle are evident,’ he adds. ‘Between 2001 and 2010, six of the world’s fastest-growing economies were in Africa and over the next five years, the International Monetary Fund is forecasting GDP growth in excess of 5% for the sub-Saharan region, with Nigeria, Ghana and Kenya projected to grow even faster.’
As with most Africa advocates, Mobius cites the wide discrepancy in growth between frontier and developed markets, 2% GDP growth for America in 2011 for example compared to 6.9% for Nigeria. ‘Growth in an economy should lead to growth in corporate earnings,’ he adds.
‘Foreign direct investment from emerging markets has made a big impact in Africa, bringing a rise in income and middle class expansion in many countries and resulting in increasing demand for consumer products.
‘For these reasons, we like the consumer and commodity story on the continent as well as the banking industry, not only because of the rise of microfinance, but also because of the growth of banks and their move into consumer banking.’
Despite many positives, Mobius says investing in Africa is not without its challenges, with political considerations crucial to investment decisions. ‘In a number of countries, political instability represents a significant threat. Corruption is a problem found in nearly all markets but it can be magnified in those where power and resources are concentrated in the hands of a few,’ he adds.
‘The good news, from an investor’s perspective, is that today corruption is openly discussed, which is a good first step toward achieving a more fair and equitable system.’
Outside South Africa, equity markets are also relatively small and illiquid and many key assets remain in state and private hands. For Mobius, South Africa stands out for its large and liquid equity market and he also highlights its benefits in accessing northern neighbours.
Apart from Nigeria, he also foresees an exciting future for Ghana, which enjoyed 14% growth in 2011. ‘The country has abundant natural resources, including timber, oil, silver and manganese, as well as cocoa and gold.
‘Furthermore, Ghana’s foreign reserves have been increasing, doubling to $5.6 billion between 2008-11, while inflation has fallen to single-digit levels. It appears the government has fostered a tight fiscal policy and budget discipline, which, combined with high cocoa prices, have made a positive impact on the economy.
‘Finally, Ghana’s stock exchange benefits from its proximity to Nigeria and the Ivory Coast, which simplifies co-operation between the exchanges and helps to improve liquidity.’
Africa’s growing economic strength is not only clear from equity markets, with its local currency debt universe also growing rapidly. Among EM debt specialists, Investec currently flags up opportunities in Nigeria, which has just made its official entry into the local currency bond universe.
Like many equity peers, the Investec team, led by Peter Eerdmans, is attracted by Nigeria’s macro growth story as one of the world’s fastest-growing economies. ‘Nigeria, with its very strong economic growth record and sizeable economy, has been on the radar screen of frontier investors for several years now,’ says Eerdmans.
‘Indeed, the country’s graduation into the JP Morgan Global Diversified index should not come as much of a surprise to anyone who has ever visited its economic capital, Lagos. The city’s sprawling population of 10 million stands as a clear testament to the energy and movement so characteristic of this African country.’
Eerdmans says a key factor underpinning Nigeria’s impressive growth trajectory over the last decade has been the ending of a protracted civil war and the holding of democratic elections.
That said, he stresses all the recent presidents have been from the same political party, which highlights that democracy is still young and remains untested by a transition of power.
‘Beyond the need for a continued democratisation, Nigeria still faces a number of other key macroeconomic challenges,’ he adds.
‘First, the country still relies heavily on oil, which accounts for 75% of government revenue and 95% of exports. Furthermore, the vested interests in several key industries, including the oil and gas sector, pose a challenge to the successful implementation of much needed reforms.
‘Infrastructure is also in dire need of investment and the country is characterised by a high level of language and cultural diversity, which does at times lead to unrest and outbreaks of violence by dissident groups.’
Overall, however, Investec says the country deserves its place in the universe and believes in the risk/reward potential of investing now.