From below the radar, Africa is slowly entering capital markets. Low levels of debt combined with higher growth potential could lead to massive development allowing it to quickly catch up with more developed markets, according to Jan Dehn, head of research at Ashmore.
“Looking at the JPMorgan Emerging Market Bond Index Global which represents the debt of 61 countries, 11 of these are African countries. This is a big representation of African government bonds in the emerging market index. Where there was nothing, a stock market emerges. This is a big change leading to whole new institutions,” he said.
For Dehn, Africa is a story about equity investing with positive prospects for investors who are looking to tap into the growth opportunities in the continent.
The case of South Africa
The year ahead is presenting multiple uncertainties for South Africa, the continent’s largest economy and a mixed bag in investors’ portfolios. The sharp rand depreciation relative to the dollar has added to investor concern. Additionally, the country is gearing up for elections in May.
Companies in South Africa no longer see profit in trading with Europe but are expanding into other countries on the continent.
“Every firm in South Africa has an Africa strategy to access the growth offered,” Joseph Rhome said, portfolio manager of the Investec Africa Fund.
The fund targets key markets in South Africa, Nigeria and Kenya. Investment choices for the fund are based on five investment themes: infrastructure, consumption, resources, financial services and telecommunications.
“Africa is often criticised for not being innovative. This is down to its legacy system. But underinvestment in building infrastructure such as fixed telephone lines has led to more innovation approaches, in this case in developing mobile networks,” Rhome said.
He is particularly positive about East Africa, where oil and gas discoveries will be “significant” within a global context.
Infrastructure
The biggest unlisted equity fund for infrastructure in Africa is run by Tom Plaistowe, chairman of the Africa Infrastructure Investment Fund at Old Mutual.
“We don’t operate on a geographic mandate, and are agnostic when it comes to what country we invest in. We’re interested in any equity opportunity,” he said.
The fund buys unlisted shares in railways, toll roads, airports, power, renewable energy and gas pipelines, social infrastructure and telecommunications.
Toll roads are a particularly good investment opportunity for the fund, which has shares in toll road companies across Africa. It’s a very typical sort of equity in infrastructure, with steady revenue, stable cash flow and capital intensive. The companies have a high barrier to entry and are mostly aimed at institutional investors.
“The need for infrastructure is massive and the real constraint. Currently it is impossible to transport goods by road or railway from the south of the DRC to the north. Flying is the only option, but very expensive. This is a common problem in many countries,” Plaistowe said.
Other areas of interest for the fund include renewable energy, particularly in South Africa where the energy market for wind and solar farms is expanding. Similarly, power generation in Nigeria could see an upswing as a growing population is in need of electricity.
Conclusion
For some time now, Africa has been sitting on the cusp of investor opportunity. But significant risks continue to impact investor decisions. Economic upheaval and government action hit markets which do not always react in the same way as more developed markets.
Yesterday's news (20 February) that Nigerian president Goodluck Jonathan suspended central bank governor Lamido Sanusi was one example of how risky it is to be heavyweight in any one sector. The departure of Sanusi, responsible for building up the economy around the banking system, caused the market to slump by 2%, and forex and bond markets closed.
While opportunities are growing and showing profitable returns for investors, a key message is perhaps not to be too contrarian. Diversification and exposure to a mix of African stocks should help keep profit and risk at balance.
