24 Nov 2009
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World
Investment in Africa
Countries in Africa are attracting the attention of many experienced investors and the story is not just about resources, says Edward Russell-Walling
Global investors have a new frontier to explore - Africa. It wasn't long ago that the continent was off-limits to all but the most intrepid portfolio investors. Today, their problem is less a fear of losing all their money and more one of finding sufficiently large and liquid companies to invest in.
If that represents a sea change in investor attitude, it simply reflects the sea change within the continent itself. With some notable exceptions, Africa is enjoying growing political stability, better economic governance and the gradual evolution of local capital markets. That attracts capital, which fosters growth, which attracts further investment in a virtuous circle.
Positive Growth
The continent is also less directly impacted by the banking and credit related troubles experienced elsewhere. The idea that this somehow decoupled Africa from the rest of the world economy has, unsurprisingly, proved rather over optimistic. Nonetheless, it remains one of the few regions where growth is likely to remain positive this year.
Nigeria paid off its Paris Club debts, some $30bn, in 2006 and the Heavily Indebted Poor Countries programme has been providing debt relief for many others. That means they can spend on badly needed infrastructure instead of merely servicing debt.
This, and booming commodity prices, helped to maintain Africa's average annual economic growth at over 5 per cent a year in the five years to 2008. Lower commodity prices and falling demand from more developed countries are taking their toll, however. This year, growth is expected to fall to 2.8 per cent, according to African Economic Outlook 2009, published by the African Development Bank and the OECD. They expect economic growth to climb back to 4.5 per cent in 2010.
Local equity and bond markets have followed the shape of the growth curve. Many remain small and, in the case of equity markets, are often dominated by financial stocks. Because of their size and the fact that they are a proxy for growth, bank shares are often the first port of call for portfolio investors.
Investment in Africa
Baillie Gifford has invested in Africa for a few decades, mainly in mining stocks. Today, however, it also own shares in the Johannesburg-listed Standard Bank, which gets a growing portion of its revenues from the rest of Africa and in which leading Chinese Bank ICBC has taken a 20 per cent share. The rapid growth and growth potential of telecommunications on the continent makes this sector attractive too, and Baillie Gifford's telecoms holdings include South African-based but pan-African operator MTN.
Resource stocks have long been an African investment staple. Many are listed abroad, for example in London or Canada so can be traded in a more comfortingly familiar environment. The power and construction sectors offer other ways of participating in Africa's economic future.
Worldwide Ties
After two years of double-digit returns, often spurred by local participation in domestic Initial Public Offerings, African stock markets corrected sharply in the wake of the Lehman Brothers collapse. But there remain a number of secular influences that should underpin the continent's economic and market development. The most important are the strengthening trade and investment ties with the BRIC (Brazil, Russia, India and China) nations.
Of these, China is clearly the most influential. Recognising its own growing need for resources, China began expanding links with Africa more than a decade ago through a combination of aid, project funding (mainly mining, energy and infrastructure) and diplomatic initiatives. While the financial crisis has derailed certain projects, China shows no sign of abandoning its commitment to Africa. Recently, petroleum major Sinopec acquired West African oil company Addax Petroleum for just over $7bn, in the largest-ever Chinese takeover of a foreign company.
Nascent Russian interest is more sharply focused on energy resources, but it too sees Africa as important to its future, as evidenced by President Dmitry Medvedev's four-day June tour of Egypt, Nigeria, Namibia and Angola in June 2007. National champion Gazprom has already committed to help finance and build the first leg of the Trans-Sahara gas pipeline that will eventually feed natural gas from Nigeria and Algeria into Europe.
India is boosting its aid to Africa and said it wants to triple annual trade with the continent to $100bn in the next five years. Sub-Saharan Africa's significant population of Indian origin gives India a particular interest in the region.
Those links work in reverse in the case of Brazil, 45 per cent of whose population claim African descent. There are also linguistic and cultural ties with the former Portuguese colonies of Angola and Mozambique. Until now, Brazil's interest in Africa has been limited to some small investments in mining and sourcing bio-fuels, but there is clearly a platform for expansion.
Living Standards
As elsewhere, growing domestic consumption is likely to form the base of further African growth, as economic management, growth and living standards continue to reinforce each other. There is one further cause for encouragement here - falling fertility rates. In 1990, the average African woman could expect to have six children. Today, that is down to five and by 2030, the United Nations says, it could fall to three. The 'demographic dividend' of this type of change has generated considerable economic gain in Asia and Latin America. Over time, it could be Africa's turn.
Edward Russell-Walling contributes to The Banker and Director, and is author of 50 Management Ideas You Really Need to Know.
Investments in emerging markets are only suitable for those investors prepared to accept a higher level of risk. This is because these markets could go down or up more than the main international markets.
The views that are expressed in this article should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
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