Shining a new light on the oldest continent

FOR Africa, after the lost decade of the 1980s and the start of a recovery in the 90s, the 21st century began with a lot of promise.

Six years hence, we have not been disappointed. Look past the bad patches (which tend to attract most of the media attention) and a strong positive trend starts to emerge.Across the globe, investors are waking up to the potential that exists on this continent of 950 million people.Africa offers handsome returns at lower risk levels than commonly perceived.Why? In summary, there is a clear and significant improvement in sovereign governance, which is leading to faster economic growth and improving business environments.Firstly, the number of countries where voters hold real power to dismiss non-performing governments is growing rapidly.We see more and more freely contested, fair, peaceful elections, where the result is gracefully accepted by defeated parties.This was rare in the 90s and virtually non-existent in the 80s.The maturing of democracy is leading to an improved focus on service delivery by governments-in-power, as well as a reduced incentive to assume power by violent means.This has been complemented by growing fiscal discipline, which is having a profound impact on almost any macro-economic measure one cares to examine.Indeed, African economies are increasingly being run by technocrats – impressive people with top-class tertiary qualifications and proud private sector track-records.Secondly we see a new spirit of African economics, evidenced by increasing implementation of free-market principles.Governments are recognising the crucial role of the private sector in meeting economic challenges.For example, previously socialist countries such as Ghana and Tanzania are adopting free-market principles with gusto, revelling in the resultant improved economic growth.The Egyptian economy has been restructured significantly, and the resultant buoyant corporate earnings growth and almost astounding real estate development is clearly visible.These changes translate into higher sustainable growth rates.The International Monetary Fund estimates that the African economy will grow at 5,5 per cent this year (5,9 per cent if one excludes South Africa, where growth is lagging the rest of the continent).In fact, Africa’s GDP has been growing faster than the global average for the last six years.This growth is also well-distributed, with half the countries in Africa estimated to have grown their GDP per capita by more than three per cent per annum (real) in 2006.The last decade has seen African capital markets developing rapidly as companies increasingly use them to raise capital.More than 400 companies have listed on African bourses over the past decade and the IPO pipeline continues to grow.Established stock markets now exist in over 20 countries, as far-flung as Tanzania, Cote d’Ivoire and Uganda.Cameroon listed its first stock last year, and Angola has inaugurated her exchange, but we are still awaiting the first listing.Many capital markets are still in the frontier stage of development – young, small and illiquid, even by emerging market standards.However, they also have significant development prospects in terms of depth (i.e.listings), breadth (i.e.market capitalisation and turnover) and infrastructure (i.e.efficient regulatory, clearance, settlement and custody structure).Along with other emerging markets, the returns from African stock markets have been phenomenal over the last three years.But when other emerging markets from Asia to Latin America took a beating in May last year, Africa’s stock markets widely emerged unscathed (with the notable exception of South Africa and Morocco).We find that the growth potential of African companies is often undervalued.This means that there are good opportunities for investors to find attractively valued, high-quality companies with good growth opportunities.Market dynamics result in frequent valuation anomalies (on the up- and down-side) which lead to good buying and selling opportunities.Roelof Horne is a portfolio manager of Investec Asset Management’s Africa Funds, investing in securities across the continent.He is also a member of Investec Asset Management Namibia Investment Working Group.Look past the bad patches (which tend to attract most of the media attention) and a strong positive trend starts to emerge.Across the globe, investors are waking up to the potential that exists on this continent of 950 million people.Africa offers handsome returns at lower risk levels than commonly perceived.Why? In summary, there is a clear and significant improvement in sovereign governance, which is leading to faster economic growth and improving business environments.Firstly, the number of countries where voters hold real power to dismiss non-performing governments is growing rapidly.We see more and more freely contested, fair, peaceful elections, where the result is gracefully accepted by defeated parties.This was rare in the 90s and virtually non-existent in the 80s.The maturing of democracy is leading to an improved focus on service delivery by governments-in-power, as well as a reduced incentive to assume power by violent means.This has been complemented by growing fiscal discipline, which is having a profound impact on almost any macro-economic measure one cares to examine.Indeed, African economies are increasingly being run by technocrats – impressive people with top-class tertiary qualifications and proud private sector track-records.Secondly we see a new spirit of African economics, evidenced by increasing implementation of free-market principles.Governments are recognising the crucial role of the private sector in meeting economic challenges. For example, previously socialist countries such as Ghana and Tanzania are adopting free-market principles with gusto, revelling in the resultant improved economic growth.The Egyptian economy has been restructured significantly, and the resultant buoyant corporate earnings growth and almost astounding real estate development is clearly visible. These changes translate into higher sustainable growth rates.The International Monetary Fund estimates that the African economy will grow at 5,5 per cent this year (5,9 per cent if one excludes South Africa, where growth is lagging the rest of the continent).In fact, Africa’s GDP has been growing faster than the global average for the last six years.This growth is also well-distributed, with half the countries in Africa estimated to have grown their GDP per capita by more than three per cent per annum (real) in 2006. The last decade has seen African capital markets developing rapidly as companies increasingly use them to raise capital.More than 400 companies have listed on African bourses over the past decade and the IPO pipeline continues to grow.Established stock markets now exist in over 20 countries, as far-flung as Tanzania, Cote d’Ivoire and Uganda.Cameroon listed its first stock last year, and Angola has inaugurated her exchange, but we are still awaiting the first listing. Many capital markets are still in the frontier stage of development – young, small and illiquid, even by emerging market standards.However, they also have significant development prospects in terms of depth (i.e.listings), breadth (i.e.market capitalisation and turnover) and infrastructure (i.e.efficient regulatory, clearance, settlement and custody structure).Along with other emerging markets, the returns from African stock markets have been phenomenal over the last three years.But when other emerging markets from Asia to Latin America took a beating in May last year, Africa’s stock markets widely emerged unscathed (with the notable exception of South Africa and Morocco).We find that the growth potential of African companies is often undervalued.This means that there are good opportunities for investors to find attractively valued, high-quality companies with good growth opportunities.Market dynamics result in frequent valuation anomalies (on the up- and down-side) which lead to good buying and selling opportunities.Roelof Horne is a portfolio manager of Investec As
set Management’s Africa Funds, investing in securities across the continent.He is also a member of Investec Asset Management Namibia Investment Working Group.