The Reckoning

The African markets are still considered a frontier too far for many, but over the last 12 months a number of managers have entered the space, on the back of roaring commodity prices and capital inflows from China and India.

“There are 200 corporates in Africa but these are under-researched opportunities,” says Stuart Culverhouse, chief economist at Exotix, a securities dealer in frontier markets. “Some markets have had reasonably good runs like Kenya and Ghana, and Zambia’s index doubled last year. Nigeria has also had three years of relatively good growth. But new funds are being set up to invest in this area every week, which helps explain why the performance has been so good.”

Mark Mobius, manager of the Templeton Emerging Markets Investment Trust, is cautious about many of the Sub-Saharan African markets, but is upbeat about their future prospects. “The growth potential in Sub-Saharan Africa is very great so we will be doing more there as we go forward, but it is going to take time,” he says. He warns that within each market there is an incredible variation in valuation and liquidity, whilst in many cases local investors still dominate.

Infrastructure push

Despite a mixed political backdrop, he sees Nigeria, Kenya and Ghana as amongst the most interesting markets. “Kenya has a pretty good history of capital market development, but we’ll have to live with political problems for a while in this region. The good news is that it is attracting a lot more investment than it has before, particularly with the Chinese, Russians and Indians moving in. And whenever you have that kind of push, you start to get infrastructure working.”

But he adds that markets like Namibia are still too small to be of interest: “When I first went there, the stock exchange was in a shopping centre,” he recalls. “And when I first went to Botswana, I walked into a broker’s office and said: ‘Where’s the stock exchange?’ And he said: ‘Turn around, you’re in it!’ I turned around and there was a list of stocks. This is the kind if thing you have.”

By contrast, Nigeria has attracted a lot of the initial interest from foreign investors because of a healthier financial sector. “Banking and insurance reforms are encouraging institutional domestic investment in Nigeria,” says Culverhouse. “The market has been led up by banks, but 8 percent non-oil GDP growth is helping the stock-market.”

Stephane Bwakira, manager of the Standard Africa Equity Fund, which invests across the continent and now has some $330 million under management, says that the recapitalisation programme in Nigeria has led to a lot of consolidation, with the number of banks in Nigeria falling from 89 to 23. “Most of them now have at least $1 billion in capital which has made them stronger and able to take on big transactions in the oil and gas sector, and the big infrastructure projects,” he says. “Historically these have gone to foreign investment banks, but the local content requirement has helped.” This says that a percentage of any business undertaken by the big conglomerates must be transacted through the local banks.

Credit expansion

The banks have also ramped up their businesses following debt write-downs, and are now taking on real risk. “The banks are competing for the same corporate business so their margins are thinning out, and therefore they are now starting to lend to retail customers,” explains Bwakira. “We are seeing mortgages, car loans and credit cards creep up. There are still some legal issues to be sorted out but the banks are expanding their footprints by opening more branches to get more clients onto their books.”

He adds that it is a similar picture in Morocco for mortgage lending, and property developers are seeing a big increase in business due to government-sponsored low income housing programmes which offer developers tax incentives. Meanwhile, the growth of housing in Egypt for the young professional classes is also supporting the expansion of real estate and mortgage lending.

Bwakira’s fund is not untypical in spreading its net wide, including stocks listed on other exchanges that transact the majority of their business in Africa, as well as MNCs with local listings. Despite the high risk associated with these small, illiquid markets, Bwakira argues that diversification across the continent offers a natural hedge. This means that when Kenya experienced violence following the disputed election earlier this year, this had no ripple effect on Zambia, and a positive effect on Mauritius, which inherited some of the tourists that might otherwise have gone to Kenya: “There is very little correlation between markets and currencies.”

He too is upbeat about the future for this region: “We have seen a lot of interest and flows, whereas three years ago it was very difficult to get anyone to even look at it, but the perception is quite different now. Africa is the last frontier market, but people are buying the long-term growth story.”

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