Although high in risk, the potential return could justify looking once more at this region.
In the 1930s the UK index included a number of African stocks, specifically: Consolidated Goldfields, Union Corp and British South Africa Company.
All of these companies still exist today, albeit with different names. Therefore almost a century ago African companies were an important part of global portfolio allocation, but over the past few decades this allocation has almost entirely disappeared. If one looks at the dates African companies were listed, nearly half are more than 75 years old. African companies have been forgotten and now it is time to review them once again.
In Africa it is relatively easy to point to a number of single stock success stories.
It is even easier to point to a number of serious problems, both at corporate and country level. However, instead of indulging in this it will be more instructive to examine some of the facts and figures that underpin the ‘Africa story’.
Demographics
Currently there are 500 million people of working age in Africa. By 2040 it is estimated this will reach 1.1 billion; put another way one in five young people
on the planet will live in Africa.
Urbanisation
Currently some 40% of Africa’s population lives in cities, up from 28% in 1980. This trend looks set to continue and already puts Africa ahead of India on a percentage basis.
Agriculture
Africa comprises 20% of the world’s landmass, but more importantly 60% of the world’s unused land is located in Africa. The land that is in use is usually farmed with low margin crops with poor yields.
Direct Foreign investment
This has grown from $9bn in 2000 to $63bn in 2008. From the five years from 2003 China alone has invested $15bn. The foreign investment also brings new management techniques, skills and general ‘know-how’.
Consumerism
Africa’s middle class (as defined as people with income in excess of $20,000 pa) is already larger then that of India. According to Global Insight’s predictions, by 2020 consumer spending in Africa will be in the $1.4 - $1.8 trillion range. There will be at least five cities spending more than $25bn with another seven in the $15-25bn range.
political stability
In 1980 40% of Africa’s population could have been considered politically ‘free.’ By 2010 this had increased to 60% and more recent events in North Africa will further improve the situation. This stability has also seen an ending of a number of the continents’ most troubling conflicts and an improvement in the business and economic environments.
Africa’s Growth
These factors show the skeleton for Africa’s potential. That does not even take into consideration the resource sector, even though this has been the largest component of African GDP growth over the past decade. The above facts and figures should confirm there is much more to an investment in Africa than just resources.
There are now other areas of growth which will generate good investment returns and which are already attracting the bulk of foreign investment. Outside
of resources, these most clearly are: consumer-facing industries, infrastructure companies and agriculture
In addition, Africa benefits from its geographical location, with Northern Africa being very close to Europe and with its languages being, in many cases, European.
Like the curate’s egg Africa is ‘good in parts.’ For instance in the Democratic Republic of the Congo the average annual GDP per capita is $330 while in Botswana it is $15,000. However, this example is very extreme. If you take the more investable African countries (the ‘African Lions’ comprise Algeria, Botswana, Egypt, Libya, Mauritius, Morocco and South Africa) you have an annual GDP per capital figure of c.$10,000, which is already slightly in excess of the BRIC nations.
The traditional reasons for pessimism in Africa are still valid, most notably political instability and the lack of the rule of law. However, using the example of Sierra Leone or Somalia on the one hand is equally as unrealistic as using South Africa or Botswana on the other. The continent has 57 countries, each on their own development trajectory. Africa has been home to some of the worst excesses of corruption but it also is home to 1,400 listed companies, hundreds of which have revenues of $1bn+ and many of which will be the fastest growing businesses of the next decade.
How to Invest
Investing in Africa in a sensible way is another reason why people have recently been ignoring this region - there are few suitable vehicles.
Although there exists an investable ETF, the Dow Jones African Titans 50, the product is indicative of the problems investing in such a large region. It is heavily invested in South Africa and in an ‘offshore’ category which covers companies not listed in Africa but which, for a portion of their activity, operate there.
If an investor wants a South African investment or a resource-based investment this is different matter, but the Dow Jones ETF is not a pure Africa investment. This same issue is also present, to a greater or lesser extent, in a number of African funds. When you look through the portfolio to the underlying investments there is a heavy concentration in South African resource companies and Nigerian banking stocks. As an investor you want exposure to all four of the growth categories: consumer, infrastructure, agriculture and resources. Therefore an investor needs to monitor the spread of investments.
Another issue to consider is liquidity. The African market is still relatively small and prone to periods of illiquidity. A fund must cut its cloth to suit the market and this
will dictate the optimum size of a fund. Raising hundreds of millions of dollars for an African fund may be beneficial for the asset management company who has raised the money but it will probably lead to an unwieldy and less-than-profitable fund. Therefore an investor should ideally be looking for a fund in the $75-150m range.
A final consideration is the geographical location of the portfolio manager. Due diligence into African companies is a ‘dirty hands’ job with travel and management meetings a pre-requisite. This can be done from Europe but it is hard to find a manager who is willing or able to dedicate the time to the necessary travel. If the manager is based in South Africa this throws up another set of complications. South African managers may be biased towards their own country and they may not look at the continent beyond the Limpopo river. Once again investors must be aware of these factors and possible problems and be ready to ask the right questions.
With ‘emerging markets’ having now entered the main stream of the investment world, Africa remains one of the final ‘emerging markets’ left.
The BRIC markets only entered the wider investor consciousness (and started to perform) once Jim O’Neill of Goldman Sachs coined the ‘BRIC’ phrase in 2001. At some point over the next 10 years the eyes of the investment world will fall on Africa and its potential will be realised and rewarded.
