How to invest in Africa

AFTER so many false dawns, it looks like Africa may finally be shining, Fin24 reports.

The continent withstood the financial crisis with the International Monetary Fund predicting that Sub-Saharan Africa will expand by 5,5 per cent this year, accelerating to 5,9 per cent next year.Africa represents a longer-term opportunity for higher returns, albeit with higher risk, says Peter Brooke head of macro strategy investments boutique at Old Mutual.’The continent is truly the last investment frontier, with good growth prospects, but underdeveloped equity markets. With its large resource base, it offers a leveraged play to the emerging consumer – particularly through soft commodities like food.’And consumer demand is growing – a recent report by the consultancy group McKinsey expects that the number of households with discretionary income will rise by 50 per cent by 2020, reaching 128 million.By 2030, the largest 18 cities in Africa will have a combined spending power of US$1,3 trillion.The Economist Intelligence Unit expects the continent will maintain growth of 5,0 per cent per year for the next five years. Seven of the ten fastest-growing countries forecast for that period are from Sub-Saharan Africa.There are many risks to this perky growth scenario, particularly the oil price. While booming energy prices are bolstering Nigeria and Angola, it may fuel food inflation – and unrest – elsewhere.Lower prices in other commodities – many African countries remain depend on resource exports – may also be detrimental.And despite increasing macroeconomic and political stability, the crisis in Ivory Coast – which could cause its economy to shrink by more than 7,0 per cent this year – showed that hazards remained.IGNORING AFRICA RISKYBut many large institutional investors now acknowledge that not investing in Africa is also risky.As large parts of the world sputter along economically, the consensus is that the region will outperform others and having exposure to it may provide some much-needed spark in your portfolio.When the Ivory Coast committed that mortal sin in the capitalist creed, for instance, by suspending its government bond repayments – demand for African bonds remained buoyant (and that market bounced back in short order), as investors desperate for the yields of 6,0 per cent decided to take the risk.Due to a lack of liquidity on many of its stock markets, Africa has also proven less prone to contagion when global markets tank.Increasingly investors are looking beyond the usual African suspects – South Africa, Nigeria and Egypt – at the continent’s so-called frontier markets.Cannon chief investment officer Adrian Saville thinks there are remarkable opportunities in Mozambique, Ghana and Kenya.All of them enjoy desirable attributes if you look at their demography, labour and infrastructure, he says.’All three of these countries have well-educated labour forces with level headed economic policies. They are in a position to harness competitive forces.’While the Mozambican economy grew by 6,0 per cent last year and Ghana is expected to grow by 13 per cent this year, Saville singles out Kenya, which has a stable production base and proximity to key trade routes.GHANA A FAVOURITEThe risk research group Business Monitor International (BMI) recently picked Ghana as one of its favourite three fast-growing frontier markets (along with Mongolia and Kazakhstan).BMI has commended the country’s stable political system with favourable business environment, and sees scope for significant currency appreciation against the dollar.The group expects the Ghanaian cedi to strengthen by 37 per cent against the dollar by 2015.Standard Bank’s subsidiary Stanbic Bank Ghana recently said it has recorded strong growth in the first quarter of this year, exceeding its budget target by 60 per cent.MTN, with Hollard Insurance, recently launched the world’s first mobile money life-insurance service in that country.To South Africans, where the local price/earnings ratio (an indicator of how expensive shares are) is almost touching 16, other African markets are looking cheap (trading on an average of 12).However performances have been patchy, with the Kenyan market falling more than 9,0 per cent so far this year.Also, buying shares on neighbouring markets is not easy.Apart from the red tape and relative unsophistication of these markets, the lack of liquidity can work against you.The much-hyped UK-based New Star’s Heart of African, which focused on frontier markets, collapsed after it could not sell investments due to a lack of trade.There aren’t any local unit trusts that focus on frontier markets, although there are some in the pipeline.’African Frontier markets got their name for a reason. Liquidity is low, volatility is high, regulatory standards still underdeveloped and political risk a real factor,’ says Coronation’s head of personal investments, Pieter Koekemoer. ‘All these characteristics make it difficult to package securities listed on these markets into traditional regulated retail funds, which rely on transparent and deeply liquid markets to support daily valuation and pricing which make it possible to allow investors to trade into and out of funds on a daily basis.’The typical way in which retail investors will obtain some African exposure at the moment is therefore through multi-asset funds.The Coronation Balanced Plus Fund has just more than one per cent invested in African markets outside SA.Koekemoer does, however, expect markets to continue to develop which will make more accessible retail-oriented funds more viable over time. – Fin24

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