It might have been Theresa May’s dancing that made headlines from her Africa visit last week, but beyond her robotic moves, and the media ridicule that followed, there was a serious reason for her trip: tapping up the continent for investment and trade after Brexit.
May was clearly on a charm offensive to make the UK the G7’s largest investor in the continent by 2022. Not only did she dance twice during the trip, she also tried to woo Africa by pledging £4bn to create jobs for young people.
So, has May’s visit, the first by a UK prime minister in five years, sparked any interest from private investors in frontier markets?
Foreign aid and defence
Ashmore head of research Jan Dehn believes May’s visit was about nothing more than negotiating foreign aid and defence contracts.
He says: “When we are talking government to government we are basically talking foreign aid and mainly defence contracts, so that is basically where the UK interacts with African governments. Beyond that, there is not a lot to be done and I don’t think that has changed for a long time.”
Africa is considered by some investors to be too unpredictable and too risky to enter via direct funds. It is also heavily dependent on commodities, meaning its fortunes are largely determined by commodity prices. It is also the least financially developed part of the emerging market space, making it sensitive to the vagaries of global economic sentiment.
Not a homogeneous bloc
Oliver Bell, portfolio manager of T Rowe Price’s Middle East & Africa Equity and Frontier Markets Equity funds, says the long-term potential of Africa is “undeniable”.
He says while Africa is the world’s final continent to develop, it is important to remember it is not one homogeneous bloc, but 54 individual countries displaying unique attractions and challenges.
“Each country is at a different level of economic development and has distinct drivers of economic growth,” says Bell.
“The continent’s growth is surpassing most other parts of the globe, political and economic governance is improving, and its demographics remain the best in the world – with 70% of its 1.2 billion population under the age of 30.”
Four investable countries
But Jason Hollands, managing director at Tilney, says despite being a massive continent, rich in both natural resources and human potential, most of the local investible opportunities in Africa are limited to four countries: South Africa, Morocco, Nigeria and Kenya.
“To put this in context, South Africa – the regional superpower – only represents 6.8% of the MSCI Emerging Markets Index,” he says. “Morocco, Kenya and Nigeria combined represents circa 20% of the niche frontier markets index and a lot of this exposure is represented by a small number of banks, commodity firms and utilities.”
That said, Hollands notes that there are many developed market companies with significant earnings exposure to Africa, including the world’s largest brewer, Anheuser-Busch InBev, which took over South African Breweries (SAB) Miller in October 2016. Consumer goods giant Unilever also has considerable exposure to the continent.
“AB InBev’s has a vast portfolio of domestic beer brands across Africa, including Castle, St Louis, Impala, Nile Special. Brewers are well placed to benefit from both population growth and spreading affluence,” says Hollands.
Lack of funds
Having just a small group of countries offering investible opportunities might explain the dearth of Africa-focused funds and why several managers have attempted to launch funds without success.
In 2009, New Star (now Janus Henderson) was forced to close its Heart of Africa fund after the financial crisis hit. Earlier this year, Old Mutual Global Investors closed its Pan African fund, stating “limited prospects” in the region as the reason.
FE Analytics lists 14 funds in the FO Equity – Africa sector. Over the past three years, the best performer has been the Allan Gray Africa Equity Fund returning 61% in sterling terms. This is followed by the Sanlam African Frontier Markets fund with 39.12% and Bellevue BB African Opportunities with 33.23%. The sector has returned 33.2% over the same period.
However, over the shorter term, returns have waned. Over six months the above funds have returned -1.56%, -3.16% and -2.23% in sterling terms, respectively, versus the sector’s -5.8%.
Too rich for some
For some fund selectors, a pure Africa fund is a bit rich at this stage and most prefer to access the region via a frontier or emerging markets fund.
Hollands says poor liquidity, lack of diversification and shaky governance standards at African corporates make specialist Africa funds too niche for Tilney. Instead he says exposure is picked up through global emerging market funds which usually limit their exposure to just South Africa, which has a long-established stock market.
Ben Yearsley, director at Shore Financial Planning, says from an investment perspective Africa is a long way behind other frontier markets but that doesn’t mean it’s not investible, it just means you have to take a very long-term view and accept there will be little liquidity.
“There are a few pure Africa funds like Alquity Africa, or you can buy a frontier fund or trust such as Blackrock Frontiers Investment Trust,” he says. “Although with the latter you have to accept that there may not be a huge amount invested in Africa at any one time.”
For Dehn, Africa has progressed beyond recognition from 20 years ago when it was solely dependent on foreign aid. Today it can still get foreign aid but also money from China. It can issue its own bonds and borrow in its domestic pension funds so donors have become more marginal in their significance.
For now Dehn says it remains a “hit and run” investment market.
“Africa is like a hit and run place because the market is quite small and illiquid, if you get in at the right time you can have very big profits but once the market has moved, there is no reason to be there.”
