Tuesday, October 26, 2010

African Frontier Markets remain a more than attractive niche, and it is not just a Commodities-play



The attached piece by Eric Kibe, portfolio manager at Sanlam, a South African financial services company, presents the case for Sub-saharan African Equities. As you know, LMG is also positive about prospects in this part of the world.


Nigerian harbor: Nigeria is Sub-Saharan Africa's largest economy

True, African markets were hit harder than the MSCI World (developed countries) or MSCI EM (emerging markets) during the period 2008-2009, but YTD they did do better although the 5 percent rebound is still small. We believe that this basically leaves the longer turn structural opportunity untapped.

For a lot of people, Sub-saharan Africa is only about epidemics and HIV infections and not about economics. But that is too simple an analysis, one that is based on what we see on Western tv. And although the fate of the diseased and infected people is terrible they are not the majority of people in this region. And actually: with improvements in economic conditions we have also seen the first signs of improvements in the health situation.


HIV in Sub-Saharan Africa: A tragedy, but there is more to tell about the region


Another group of people still judge the African continent's investment opportunities based on how things were in the 1970s and the 1980s. The latter decade is even called a lost decade in Africa. In the 1990s the IMF and the World Bank took their responsibility and through austerity programs the African economy was cured to such an extent that debt levels ended up lower than before without hurting economic growth rates that were often far north of 5 percent. Obviously the demand for commodities from other Emerging Nations like China and India has played an important role in this. But we are now in a period in which the increased wealth is also translated into growth in other sectors.


More than just a commodities play


True, Africa is still by far the poorest continent. But when the tiny little beginning of a middle class starts to emerge and the poor see some improvement in their position as well, and we are dealing here with countries who were basically empty when it comes to retail, telecom, financial services, food industry etc this will provide a growth opportunity for savvy entrepreneurs. And so it did. In telecoms we all known the story of Mo Ibrahim, the Sudanese born (now British) telecom entrepreneur and philanthropist. The growth in banking in a country like Nigeria are another example.

So it is not just oil, commodities etc. Which is not to say that the demand for commodities is not Africa's backbone. It is and will be for some time to go. But investments are about percentage growth (returns) and the volatility of these returns and with political risks coming down and return patters more stable - also because of a developing intra-regional trade which makes the countries less dependent of the global economy outside the commodity sector - prospects remain good.

And this is not a new story. If we compare index returns for the period 2003-August 2010 we see the following results:


2003-2010(8): So Sub-saharan Africa wasn't just HIV and stagnation!


Doesn't this translate into some kind of mean reversion fear? I.e. isn't it risky to buy African stocks now? No, we do not think so. This high return for the period 2003-2010 is more indicative of how terrible the situation was when Africa started to benefit from the measures taken in the 1990s. 

True: this will remain a market with relatively illiquid stocks and therefore illiquidity risk will be an add-on risk on top of the already substantial economic and political risks. But it is a great niche component within your portfolio. Unfortunately too many investors do not even plug it in for that purpose. And that is wrong.


 Click here for the original contribution published on Money Web.

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