News analysis on African investment

There follows a news analysis by me for Fund Strategy on investment in Africa. Parts of it are technical but it is mostly accessible to general readers. There was also a related comment piece.

Fund groups seem to be taking Africa seriously at last. New Star recently let it be known that it is seeking regulatory approval for a Heart of Africa fund, which will be available to retail investors. A few days later Stanlib, the asset management subsidiary of South Africa’s Standard Bank, launched two Africa Ucits III funds: one investing in South Africa and one in the rest of Africa.

Other fund groups are also responding. Fidelity has announced that South Africa will be a key holding in its new Emerging Europe, Middle East and Africa (EMEA) fund. And Investec, a South African-owned firm, is busy promoting its Africa funds.

To anyone with only a cursory knowledge of Africa this sudden interest probably appears odd. The mainstream media discussion of Africa tends to focus on such disasters as Zimbabwe’s chaos or the Darfur crisis. Then there is the annual Red Nose Day, which portrays Africans as perpetual victims in need of Western charity. It hardly seems an attractive place to invest.

But there is a strong case for investment in Africa. Politically it has become more stable and investor-friendly than at any time in the post-colonial period. Economically the continent is booming. The International Monetary Fund (IMF) forecast of GDP growth of 6.2% for Africa this year compares with 4.9% global growth and 2.5% for the advanced economies.

John Mackie, the head of African funds at Stanlib Asset Management in Johannesburg, says: “There is a very strong underlying growth story, a lot of positive political developments and a lot of positive regulatory changes”.

On the political front, African countries have moved away from the nationalist economic policy of the 1960s and 1970s. Today they are generally keen to encourage foreign investment as a way of promoting development. And they have mostly escaped from the economic stagnation that devastated Africa for much of the 1980s and 1990s.

On the economic front the continent is benefiting from the rapid growth of the world economy, and particularly China. The rapid rise of China as an industrial power has pushed up raw material prices, which in turn has boosted African producers. China is also investing in African infrastructure in return for access to raw materials such as copper, diamonds, oil and platinum.

But African development has not been restricted to raw materials and infrastructure. The rapid penetration of mobile phone technology is having a significant impact on the continent. Africa is also benefiting from increased tourism.

David Christie, the head of distribution for Ashburton in sub-Saharan Africa, is positive on what he calls a “cascade effect” as growth in one sector leads to broader development. “The emerging black [African] market has really taken to consumerism,” he says.
The case for African investment is based mainly on these broader developments. But it also benefits from a low correlation with Western markets. Most African equity markets and currencies do not move in line with those of the developed world.
Of course investment in Africa also involves potential problems. Even the most ardent of advocates of Africa funds generally concede there are significant risks.

On the economic front the biggest risk is that the boom subsides or even goes into reverse. Africa has had growth spurts before but they have often proved unsustainable. If the world economy slows, and China’s appetite for raw material subsides, the basis for Africa’s recent growth would be threatened. Although Africa may be diversifying economically, it remains heavily dependent on natural resources.

Fears of such a reversal are at the forefront of the concerns of such organisations as the IMF and the United Nations’ Economic Commission for Africa (ECA). To quote the ECA’s “Economic Report on Africa 2007”: “The current growth momentum … rests on a very fragile foundation. The continent continues to rely on primary commodities whose prices have been major sources of trade shocks.”

In relation to politics, the main concerns are exemplified by Zimbabwe, with its hyperinflation and stagnant economy. Investors fear that the rest of Africa could revert to such conditions but it is important to recognise that the country is at present an exception. “Zimbabwe is a basket case at the moment,” says Stanlib’s Mackie. “But it is only one of 50 countries in Africa.”

There are also ways round some threats within African countries. One is to invest in companies, either African or with strong African interests, that are listed in places such as America, Australia, Canada or Britain. It is also possible to invest in South African companies as the country’s market is relatively developed and many of its firms invest widely in the continent.

Perhaps the biggest immediate risk is liquidity. Buying and selling African stocks can be a cumbersome process. But diversification in stocks in different countries and sectors can help mitigate this problem.

Whatever decisions investors make, it is important to put Africa in its proper context. Its 920m people make up about 14% of the world’s population, but in economic terms it accounts for only 3.4% of global output. Its stockmarkets are so small that MSCI only has indices for Egypt, Morocco and South Africa.

If investors decide to invest in Africa, it is not likely to make up more than a small proportion of their portfolio. But if Africa manages to sustain the growth rate it has achieved in recent years, that could change.