Will Africa ever become a major investment destination?

We ask industry figures if they think the continent offers opportunities.

Mark Mobius, executive chairman, Templeton Emerging Markets Group

We believe the outlook for Africa is positive. It has stirred the interest of countries like China, India and other fast-growing emerging markets, which require increasing resources for their growing economies, as well as countries like Russia and Brazil, who look to expand their enterprises into global operations. South Africa, acting as a representative for the continent through the World Cup, has shown that it can host an international event to international standards, and we believe this bodes well for the region’s future investment prospects.

Africa as a whole has some of the world’s greatest deposits of natural resources, and only a fraction of those resources have been tapped so far. It is not only Africa’s mineral resources that appear attractive but also its agricultural potential and the abundance of water that we think may decide the rise and fall of nations in the future. In addition, the continent has a young and growing population, and its people could improve their education and skills to become a major asset to expanding manufacturing and mining enterprises.

While South Africa is by far the largest and most liquid of the markets in sub-Saharan Africa, we are now also looking at lesser-known markets in the African continent, including Nigeria, Egypt, Kenya, Botswana, Ghana, Morocco, and Tunisia. Liquidity is the key concern for most investors, so markets that are the most liquid could attract greater investment flows. While markets in some African countries are developing quite rapidly, we think they have a long way to go before their potential is fully realised. In the meantime, private equity investments present an alternative channel for direct foreign investment, which is needed as a starter.

Roelof Horne, portfolio manager, Investec Africa Middle East fund

There is no doubt that Africa will become a major investment destination. The real question is “When?” The answer to this question lies in the hands of Africa’s people, and in particular, Africa’s leaders.

A common error of logic is to pick out problem areas or countries, and hold this out as “evidence” that Africa is a terrible place, not worthy of being called an investment destination.

By looking at these “snapshots” as opposed to “Africa, the movie” one easily misses the vast improvements. Far more important for an investor than the absolute state of an environment is the direction of change: ‘A bad place improving’ is more often than not a better investment idea than ‘a good place slowly decaying’. Africa is a tough place to do business, and infrastructure is mostly poor, but this also makes the barriers to entry high and keeps the competition away. It is no wonder that established businesses in Africa enjoy high margins and high returns on equity. Combine that with excellent growth potential, now that Africa is showing high GDP growth and more importantly, high GDP per capita growth, and Africa becomes highly interesting in a world of budget deficits, stimulus packages and debt-burdened consumers.

What is still holding Africa back? Capital wants security and growth. We need more leaders that are in politics primarily to do something for their people and their country, and not because it is a ticket to personal power and wealth. We need African governments to remember the core reason for governments to exist – the provision of things best achieved on a communal basis: infrastructure, services such as health and education, security and rule of law. Build the roads and ports, generate and distribute the electricity, cut the red tape, and then sit back and be astonished by the economic growth that will follow.

Goolam Ballim, group economist, Standard Bank

Yes, and this is confirmed by the incontrovertible evidence gleaned over the last decade.
Generally, investors will seek to extract the rewards from access to resources and markets, efficiency gains and the buying of strategic assets. The risk assessment is typically framed by macroeconomic stability, institutional quality and the level of economic development.

Although not uniform, Africa has shown extraordinary progress in political and economic governance. In 1980 two-thirds of Africa was considered “not free”, while today two-thirds of the continent is either free or partially free, according to the independent agency Freedom House. Moreover, Africa offers increasingly liberalised markets, deepening financial systems, abundant commodities and labour, and in recent years the swiftest pace of economic growth since the 1960s.

Africa’s share of foreign direct investment (FDI) has swelled by nearly 50% since 2000 and the pace of inflows has been about twice that of Latin America. Notably, FDI in Africa declined the least among the world’s continents last year, adding substance to the secular nature of Africa’s investment revival. For the first time in modern history, the West is playing catch-up on the continent as new partners from Asia and other emerging regions vigorously embrace Africa
In an increasingly multi-polar world, Africa’s relevance and participation is hardening. The surge in investor inflows serves as credible testimony.

Jake Moeller, head of investment research, Alico

Africa is already an important investment destination. The Chinese Government has invested heavily across the continent, showing notable interest in Angolan mining operations. However the retail investor cannot play this region prudently given the chronic lack of liquidity. Based on total value traded, only the South African stock market can be considered to be truly liquid.

Remaining trading concentration is poor, with Egypt, Morocco and Nigeria forming the bulk of activity outside of South Africa.

There are two Africa-facing funds which are domiciled in the UK (offered by Fidelity and Investec), as well as more than 50 others based offshore. The majority are MENA – Middle East and North Africa – funds, but there are a growing number of solely Africa-focused investment funds being offered to the market.

“We currently advocate the broader approach and link to Fidelity’s EMEA fund, but we remain receptive to a purer pan-African exposure which we would consider in order to diversify our Alico Managed portfolios.

There is a strong secular African growth story – based on commodities, human capital and political reform - which could underpin an investment case for the next five to 10 years.

Whether volumes increase will ultimately come down to general market confidence and risk appetite.

Jamie Allsopp, fund manager, Insparo Asset Management

Invest in Africa, the hopeless continent? “No chance, nothing but war and famine” would have been the response a decade ago. Today, opportunities abound. Political instability has become the exception rather than the rule. A rapid rebound to growth rates of 5%-6% across the continent makes Africa a bright spot in an otherwise gloomy world. China and other forward-thinking investors have noted Africa resource endowment, including hard commodities, hydrocarbon wealth, 60% of the world’s uncultivated arable land and plenty of fresh water. The continent’s demographics are favourable too. The one-billionth African was born last year and by 2040 Africa will have the world’s largest working age population. The combined consumer spend is predicted to rise from $860bn in 2008 to $1.4tn in 2020, led by food and beverages.

The largest cities, Alexandria, Cairo, Cape Town, Johannesburg and Lagos, will each have more than $25bn a year in household spending, in line with current levels for the conurbations of Mumbai and New Delhi.

Specialised funds have surfaced, ready to invest an estimated $20bn over the next four years. Foreign direct investment in Africa dipped to $59bn in 2009 as global liquidity contracted but is expected to breach $80bn within the next two years. Merger and acquisition activity has been on the rise too. Bharti Airtel of India this year bought Zain’s pan-African mobile telecommunication assets for $9bn. In late 2007, China’s Industrial and Commercial Bank acquired a 20% stake in Standard Bank for $45.5bn. These are landmark deals that position Africa in the foothills of a long-term bull market.

Julian Chillingworth, chief investment officer, Rathbone Unit Trust Management

In the current climate, there’s no doubt why investors are exploring frontier markets for returns.  Having worked in Africa in a previous life, it remains a continent plagued by corruption on a massive scale; currency controls; foreign ownership restrictions; unstable governments; civil wars/coups; volatility of tax rates; not to mention ethical abuses with regards to child labour.  

There may be some signs of an improving business climate and economic outlook, but there’s a very long way to go and money can be lost along the way.  However, there are ways to play the continent indirectly, thus mitigating some of this risk.  One of the main beneficiaries of the World Cup, for example, was temporary power supplier Aggreko, which won a £30m contract to supply power for all the journalists and TV stations at each stadium.  More generally speaking, electricity demand growth is outstripping supply in developing nations, and the problems associated with financing multi-billion dollar power stations, that take years to build, is causing power shortages across the continent.  

Indeed, these mobile power generators are plugging the gaps left by years of under-investment and are becoming a permanent solution in Africa, where they supply 20 countries with over 1000 megawatts of power. Just to give you an idea, one megawatt can power approximately 1000 US homes for one hour. So our conclusion is that it will take years for Africa to become a ‘safe’ destination for investors. There are many hurdles, and investors are best placed to have more direct exposure to Africa via international companies that have a presence there.

Otherwise, we believe that indirect exposure to the structural shortfalls is still the safest way to play investment in the continent.

Nick Price, manager, Fidelity’s Emerging Europe, Middle East and Africa fund

Africa remains plagued by negative perceptions and it is the wars, famines and dirty diamonds that grab the headlines, not the spectacular growth. The region remains one of the last unrecognised growth opportunities in the world with GDP averaging 5.3% over the last decade.

In fact, growth in Sub Saharan Africa has been consistently above that of advanced economies in recent years.

Africa is an extremely attractive region from an investment perspective. It is an incredibly diverse region and what I am looking to do is to take advantage of the upliftment of the economy through as broad a range of investments as possible. This is not all about oil or mining; it is about investing in consumer relating industries in this region and seeing the demand growth come through of a period of time.

Good examples of how investors might gain exposure to Africa’s emerging consumption growth story include beverage company, Guinness Nigeria and South Africa-based media conglomerate, NASPERS. Guinness Nigeria benefits from having one of the highest profit margins in the world for its core product. On the hand, NASPERS is a much more diversified global play that among other areas has a significant exposure to the fast growing satellite and cable television markets of a number of sub Saharan African countries, including in its more mature home market of South Africa.”

Emma du Haney, senior fixed income product specialist, Insight Investment’s Absolute Insight Emerging Market Debt fund

Despite being a huge continent, with some 18% of the world’s population, Africa only makes up a tiny proportion of GDP, some 3%, according to recent data. Thus, clearly the investment opportunities are there, however there remain political, legal and structural issues which will make this a slow process. The make up of the Continent is a factor: some 61 territories each with its own issues. Land title is an issue in many countries and this is a clear discouragement to inward investment. Politics is a problem in many countries. Some of the mineral rich countries have not dealt properly with their new found wealth and it remains concentrated in the hands of a few. This creates barriers to investment in infrastructure and education.

However, in some countries the signs are more encouraging. Oil and gas discoveries in countries such as Ghana and Gabon (with relatively stable politics) have encouraged lots of foreign investment.

In terms of the investible universe from a fixed income perspective, South Africa is clearly the major destination. It has a well developed local and external debt market which is actively traded. Some of the smaller countries have made progress in accessing the external debt markets for funding. Both Ghana and Gabon are cases in point. We also recently participated in a new issue from the Cote d’Ivoire. This is a country that previously defaulted on its debt.

However, the structure and pricing of the new bonds and our own detailed macro economic analysis mean we’re comfortable in taking a position.

In terms of gaining best access to the African bond market, an absolute return approach is arguably better placed than benchmarked vehicles because many countries are not represented in the indices and thus not researched in any depth by investors. So long as liquidity and transparency are key, an absolute return approach has the flexibility to invest without benchmark considerations as and when a new or under-represented country comes to market with an attractive proposition. While it will be a slow process, we expect the African bond market to offer interesting investment opportunities in the coming years.

Andrzej Blachut, head of emerging market equities, Swiss & Global Asset Management
Africa is experiencing significant political and economic changes which are improving its business environment. International investors have recently woken up to the continent’s opportunities. Its growing integration into the global economy, high level of commodity resources and increasing investments in infrastructure are some of the main reasons why Africa is finally on the radar of foreign investors. The improved prospects of the African economies should pave the way for meaningful investment opportunities. However, with the exception of South Africa, financial markets in Africa remain relatively underdeveloped.

Nevertheless, significant progress has been achieved. The majority of African countries are still in the frontier basket, and this will not change in the short term. The biggest issue for African countries is the job market, as there is a huge, yet unfortunately unskilled, young workforce. A lack of investment in education has inhibited international investment in Africa’s industrial sector.

I do not expect that Africa will take over from Asia as the main investment destination in the next 10-15 years. Usually, a country’s economy starts to accelerate after crossing the level of $3000 GDP per capita. Today, this is the case for Chindonesia (China, Indonesia and India). In 15 years it may become the case for Africa. The continent is still a niche market but it is developing very fast - portfolio managers and investors cannot afford to ignore it.

Ryan Hughes, senior fund manager, Skandia Investment Group
I’m certain it will and arguably parts of it such as South Africa already are and have been for years. Africa remains the last great continent that hasn’t fully embraced the equity markets but surprisingly actually has over 20 different stocks exchanges across the continent. These range from Botswana to Namibia and Rwanda to the more renowned markets such as South Africa which has been in existence for over 130 years, whilst a stock exchange has existed in Egypt for even longer.

Clearly, it is likely that it will take a considerable time for Africa to become a major investment region, particularly as it currently accounts for only a fraction of global GDP. But parts of Africa are growing very fast and in 2011 the OECD is predicting GDP growth of 7% and there are huge demographic factors that will drive this growth even higher. In many ways Africa is similar to today’s BRIC economies 30 years ago when few would have believed that these economies would become the major force in global investing. Whilst Africa has some considerable challenges to overcome, with many countries blighted by civil war, crippling debts and corrupt regimes, there remains huge potential and countries like Nigeria will be critical in driving this growth forward. As with any frontier market, corporate governance will remain an issue but I am certain that in 30 years time Africa will be playing a significantly greater influence in our investment thinking.

Simone Lowe, manager, Thames River Africa Focus fund
It is our belief that Africa is at a tipping point and that in the not too distant future, we will be talking about the strength of Africa in the same way we have talked about the BRIC and Asian Tiger economies in recent years.

Surprising to most, Africa is on a par with both the BRIC and Asian Tiger economies according to key development indicators such as life expectancy, literacy, education and standard of living. GDP growth in Africa is expected to be 4.75% this year and increase to 6% in 2011. The emerging middle class in Africa will also lead to an expanding labour force and urbanisation. In 1980 only 28% of Africans lived in cities; today this number is 40% and growing rapidly.

By 2040, Africa will be home to 1 in 5 of the world’s young people and the size of its labour force will top that of China. Africa has almost 60% of the world’s uncultivated arable land and a huge wealth of natural resources. Its consumer facing sectors are growing at a phenomenal rate and the rate of foreign investment is higher in Africa than any other developing region.

While Africa does have its fair share of political and corporate governance issues, governments have made a concerted effort to end armed conflicts and create a better business climate. The above are just a few of the compelling reasons to invest into Africa and we do not believe that investors can ignore Africa as a major investment destination.

Dylan Evans, director of global investment markets, STANLIB
Africa represents less than 1% of global stock market capitalisation, yet it possesses 20% of the world's population. Nigeria and Angola alone produce almost as much oil as the Middle East and the continent owns double-digit percentages of many major metals and other resources. So why is Africa's share of global investment portfolios so low?

One reason is historic. Before 2000 most of Africa's stock markets were undeveloped and poorly regulated. But that has changed. Regulation has been brought up to internationally acceptable standards and the introduction of electronic trading and settlement systems has made Africa much more accessible to professional investors. No tougher test could have been devised than the global stock market crash of 2008 and not one African market suspended trading - a conspicuously successful coming of age. Africa is slowly being rewarded for this.

There are now over 20 dedicated Africa funds worldwide and a number of these are UCITS funds, for which regulatory and operational standards are at their highest. So the infrastructure for trouble-free investment into Africa now exists, whereas a few years ago it did not.

It can certainly be argued that investment flows can only go one way. A recent survey of the largest 100 UK pension funds revealed that only one had any dedicated exposure to Africa. Not one of the largest European pension funds did. One or two sovereign wealth funds have begun to dip a toe in the water but the private investor is almost entirely absent. Yet Africa has maintained GDP growth of above 3% even during the depths of the last two global recessions and since 2003, Africa has been the best performing stock market region of any in the world.

But while portfolio investors have been slow to recognise the continent's potential, direct investors have not. China, India and a number of the Gulf States have invested billions of dollars into Africa in recent years. At some point, Africa's superior economic growth prospects and modest stock market valuations look certain to ignite the interest of portfolio investors as well. Even if Africa's slice of the global investment cake rises to just 2%, that should mean a handsome return to those willing to take a view and step in early.

This article first appeared in Investment Week.