More bang for your buck if you invest in Africa

You are more likely to return a substantial investment if you invest in Africa. It’s a low risk, high reward place to return a good profit, especially since there isn’t a lot of competition.

Africa is the place to go for the “frontier market investor” who is seeking a new investment venue with a high rate of return, says Donald Elefson, portfolio manager for the Harding Loevner Frontier Emerging Markets Fund, which invests the largest amount of its multi-billion dollar fund — about 33 percent — in Africa.

In a September 22 interview, Elefson said U.S. investment yields are at all-time lows, which can directly benefit emerging markets like Africa.

“I think you are seeing more and more people looking for return — be it yield or exciting equity-type opportunities — and that is where the frontier market [like Africa] is really coming to the forefront. … The frontier markets are going to be the biggest beneficiaries of the low interest rate environment that we have in the developed world,” he said.

Elefson recently told the U.S. investment weekly Barron’s that Africa offers “strong markets and huge potential.” Additionally, he said, people do not give Africa enough credit for confronting corruption — something that Elefson sees as a “generational” issue.

“When I go to Lagos, when I go to Nairobi, I see a lot of Africans who have been educated and have gained work experience overseas coming back home because of the potential that can be found there. They are a new breed. They are not like that older generation. They realize that you can get somewhere, you can accomplish things, without pursuing corruption. It is a new mindset. These are the new leaders. These are the Africans who will rise up and be the new leaders that will drive return on capital going forward.”

“I am speaking from the perspective of the investor, both what I do in terms of equity investments in companies listed on stock exchanges and companies that are not listed on stock exchanges but may in the future.” Elefson said that while his mutual fund only invests in listed companies, “I am a firm believer that the opportunity for both of those sectors is huge” Elefson told America.gov.

Elefson explained why as a portfolio manager he is so “bullish” (enthusiastic) about investing in Africa. “First of all, we have a historical precedent to argue our case in Africa, and that is seen in the markets of Brazil, Russia and China.”

“I have been investing in emerging markets for 20 years. When I started, China and Russia were not open. When they started to open in 1992 and 1993, we were pursuing investments there but people were laughing at us. They would say, ‘We would never do that. Russia is an ex-command economy, China is an ex-Communist economy.’ You have heard the story. But now, try to find one listed equity fund that does not have China or Russia in it. You would be hard-pressed to find one.”

A similar situation now exists in Africa, he said.

He pointed to the example of Brazil. “When I started investing in emerging markets, Brazil was the attractive emerging market but it was also the biggest economic and political basket case in the world: inflation was 1,000 percent, corruption was present; Telebras [the telecommunications company] was a state-owned company; Petrobras [petroleum] was a state company. In the past 15 or so years, Telebras broke up the telecommunications monopoly and hived off different individual operating companies; Petrobras is now owned by everybody” as a private-sector company. “So what I am saying is that if it worked in Brazil it can work in Nigeria.”

In Nigeria, he said, Nitel — the Nigerian Telephone carrier and its companion mobile phone company — are both state-owned. “They are in the process of being liberalized, privatized and sold off, just like Brazil. NPC, the Nigerian Petroleum Corporation, is a similar entity to what Petrobras once was, and that is in the process of being liberalized.”

“The difference is Nigeria does not have control of their offshore economics. Nigerian companies participate in a very low level of offshore exploration and production … so not only do we have an oil company that can be liberalized, but also one that has increased market and revenue potential when that offshore potential is realized. But that is just Nigeria.”

Looking elsewhere in Africa, Elefson compared Kenya to Mexico of an earlier time. He said Mexico “made its bones” (became an international investment opportunity) by becoming more closely integrated with the United States and its neighbors to the south.

“Kenya is a part of the East African Community, which is made up of five potentially high-growing economies [Kenya, Uganda, Tanzania, Rwanda and Burundi], and Kenya is the leader of the pack. So there are quality companies now in Africa that would pass anybody’s test on fundamental analysis. … I could go on and on with examples, but my argument is that emerging markets have allowed many countries that nobody ever thought would grow into investment destinations to grow, and the same thing, I believe, is under way in Africa right now.”

Elefson said all of the new African companies that are sprouting up across the continent realize one thing: “If we are going to grow, we need capital and we cannot depend on our government any more to give us that capital. … We need foreign investors,” who require the transparent reporting of numbers and results. “So it is foreign investors rising in status that is forcing the change or confirming the trend of change at the company level, and it is impressive,” he said.

Information is one of the biggest factors aiding the investment and development trend in Africa, he said.

“Right now, they just landed two undersea cables to the East African portion of the continent. Broadband prices could go down as much as 90 percent [below] what they were even two years ago. That makes broadband Internet, data over the cell phone, and data to the home much more affordable. That means a person with an idea, with an aspiration, can log on immediately and see what other people are doing,” he said. “They have Facebook, Twitter and all of this stuff. I don’t use them. I don’t like them. But they are wonderful conveyors of information. They are catalytic. So that is going to stimulate a whole new breed of entrepreneurs. It is going to change the gestation period of an entrepreneur from ‘This is an idea, let’s think about it for years’ to ‘I can see an example of this so maybe I can do it sooner.’”

The word is beginning to spread around about the great investing opportunity in Africa.

The continent already has seen a record $54 billion in mergers and acquisitions this year, including Wal-Mart Stores’ offer of more than $4 billion for South Africa’s Massmart Holdings last week. A raft of Africa-focused funds also have been launched. The Renaissance Group is seeking $1.5 billion, while 8 Miles, a fund fronted by Bob Geldof, aims to raise another $750 million. For once, this enthusiasm seems warranted.

[AFRICAHERD]

Growth is one reason. The continent’s gross domestic product should rise 4.6% this year, up from a recession-beating 2.5% in 2009. The industrialization of India and China should help underpin high commodity prices, still Africa’s principal resource, and both countries are investing heavily in the continent. Africa’s population could double to 1.8 billion by 2050. Poverty, and in some places crime, remains chronic. But the opportunities are huge: The consumer-goods, agriculture, resources and infrastructure sectors may generate $2.6 trillion in revenue by 2020 compared with $1 trillion today, according to McKinsey.

Africa also offers high returns on investment compared with other developing countries. Limited competition means margins are fat. For example, only four banks have a substantial presence across the continent: Barclays, Citigroup, South Africa’s Standard Bank and Standard Chartered. New competitors are being lured in. HSBC Holdings is in talks to buy South Africa’s Nedbank Group. Nigeria’s Guaranty Trust Bank and Zenith Bank may resume a crisis-interrupted push into neighboring markets. In the retail sector, Wal-Mart has stolen a march over Carrefour and Tesco, rivals largely absent from Africa.

Valuations are cheap. African consumer businesses are valued at less than 10 times forward earnings compared with more than 20 times in other emerging markets, according to Renaissance.

The improved economic outlook also could spur growth in often embryonic public markets as African-based companies seek more local equity and debt financing. That would provide more opportunities for investment funds to gain direct exposure to Africa’s development as well as easier exits for private-equity investors. As it is, Actis, a private-equity firm with $1.5 billion in funds under management in 17 African countries, managed to float 100% shares of Nigerian telecom company Starcomms locally in 2008.

Major constraints exist all the same: volatile exchange rates, corruption, poverty and political instability in key countries like Egypt, Nigeria and South Africa. Small economies—Massmart’s valuation is bigger than Zimbabwe’s GDP of $3.5 billion—could be swamped by capital inflows. Managing them and controlling inflation are big challenges for Africa’s young democracies.

Africa suffers from an acute skills shortage even in relatively developed countries like South Africa. But there is a real chance Afro-pessimism is finally giving way to Afro-optimism.

This is a great opportunity to make a good profit before the chances are reduced.  In the eyes of the investment world, Africa is widely viewed as a complete basket case. Comparisons with Asia, which also suffered the indignities of colonial exploitation, are particularly irksome, since certain people in Africa blame colonialism for the continent’s many economic failures.

The World Bank estimates that real income per head in the 48 countries of sub-Saharan Africa rose on average by only 25% between 1960 and 2005. In East Asia, real income rose 34 times faster. In the 1950s, high-technology South Korea was as poor as Ghana and Kenya. Now, South Korea is the world’s ninth-largest economy.

Africa today evokes images of grinding poverty, natural disasters and appalling infrastructure. More than 70% of Nigeria’s 140 million citizens live on less than $1 a day. Congo’s infamous child soldiers fight in a country wracked by violence. Somalia is a failed state whose civil war is spilling over to Chad. Zimbabwe’s Robert Mugabe has taken the mantle from Uganda’s Idi Amin as the new millennium’s poster child of an African dictatorship. Add to this reality the region’s world-beating political corruption — the most recent example is last week’s farcical elections in Nigeria — and it is clear why investors want to stay out of Africa. By all measures, Africa appears to be a colossal flop.

Investing in Africa: The Surprising Good News

“People love China and India, like Asia, are skeptical about Latin America and hate Africa” opined accurately the manager of one of the few African investment funds.

This conventional view, however, is surprisingly inaccurate. Over the past decade, parts of Africa have taken baby steps towards greater prosperity, security and democracy. Snake oil “African socialism” from the 1960s has been supplanted by private enterprise and freer markets. Even Nigeria, arguably the most corrupt nation on earth, is — by conventional standards — a macroeconomic success. Nigeria’s annual GDP growth had more than doubled between 2003 and 2006 to an average of 7.3%. Inflation in Nigeria dropped to single-digit percentages last year. And thanks to a boom in oil exports, Nigeria’s foreign exchange reserves are approaching $50 billion.

Nor is Nigeria alone. For the third year in a row, sub-Saharan African countries grew by an average of 6% and are nudging toward 7% this year. At this rate, Africa’s poverty rate will halve by 2015. Take India and China out of the equation, and sub-Saharan Africa is actually growing faster than Asia.

High oil and other commodity prices have provided a much needed tailwind to African growth rates. But here’s the surprising news: non-oil producing African countries are recording similar rates of growth. Thanks to pragmatic government policies and an emphasis on tourism, Kenya is one of Africa’s fastest-growing economies — despite having no commodities. Zambia’s copper exports are complemented by agricultural exports. Africa is even beginning to boast an emerging middle class. In Nigeria, mobile-phone penetration is 8% and rising fast. Optimists hope that a combination of debt forgiveness, improving infrastructure, and accumulated financial reserves have combined to create a momentum that could keep going even after the commodity boom ends.

Investing in Africa: Making a Mint in African Stock Markets

Another surprise: the few investors who can access African stock markets are making a mint. Between 1995 and 2005, African stocks showed compound annual growth of 22%. Last year, the stock market in Kenya rallied 46%, while the local index rose nine times, in dollar terms, over the past 10 years. In 2006, equities jumped: 75% in Morocco; 69% in Uganda; and 55% in Botswana. Nigeria’s stock market capitalization has doubled during the past 12 months to about $45 billion.

How is this all possible? It turns out that African companies are some of the most profitable and fastest-growing in the world. The very reasons not to invest in African stock markets — political uncertainty, corruption, poor infrastructure — mean that the firms that do succeed are some of the savviest around. Yet thanks to the “Africa discount,” they trade at half the levels of Western counterparts.

Investing in Africa: China Yet Again

While much of the West ignores Africa, China has become a new, eager suitor of the Dark Continent. China’s President Hu Jintao recently set off on an eight-nation tour through Africa. He promised $3 billion in soft loans and a doubling of Chinese aid to the continent by 2009. In the last 12 months alone, China’s leaders have visited 48 African nations.

China’s efforts are not borne of feel good development policies, but of pure economic self-interest. China needs Zambian copper, Nigerian oil, Tanzanian timber and South African platinum to achieve superpower status. The Chinese strategy is built on largess — a savvy exercise of “soft power.” Chinese investment has paid for roads in Ethiopia; financed the building of 100 schools and 30 hospitals in Liberia; rebuilt Angola’s once-famous Benguela railway; and set up a road-building program in Mozambique. Chinese investment has already revitalized large parts of Africa and areas of Africa have much better infrastructure than they did just a few years ago.

And, China’s efforts are paying off. Trade between China and Africa soared 40% to a record $55.5 billion last year. Direct investment has reached a cumulative $6.5 billion. A whopping one-third of Chinese oil now comes from Africa.

Investing in Africa: The Last Great Opportunity

Africa is widely perceived as poor and corrupt. But the best investment opportunities lie where perception differs from reality — where things aren’t as bad as they seem. Africa fits that bill perfectly. It’s hated. It’s undervalued. It’s difficult to invest there. It reminds me of how former Communist Eastern Europe and Russia were viewed in the early 1990s. As Hermitage Capital founder and Russia’s largest investor Bill Browder observed: “Russia is sh*t. But as long as it gets a little less sh*tty, I make a lot of money.” That’s why his investors have made 25x on their investment money in the last 10 years — and Browder walked away with more than $160 million in 2006 alone. If that’s not an incentive to look at Africa, nothing is.

Here are some video highlights of the investment opportunities in Africa.

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2 comments

  1. Very interesting articles to read about Africa. I hope investors and companies from North America view Africa countries as per this analysis otherwise China will continue to score big in Africa economy. Before it is too late they should take advantage of Africa investment opportunities.

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