Into Africa
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Suddenly, fund managers are starting to view Africa as a good investment. But can the boom it has enjoyed for several years be sustained? Daniel Ben-Ami reports
Here is the good news from Africa. Economic growth has exceeded the global average for every year this decade (see chart). GDP per head has grown for 12 consecutive years. Inflation is falling. The number of people with mobile phones is surging. And the continent’s politics is becoming more stable. It is against this backdrop that several groups have launched or are about to launch Africa funds. Africa suddenly seems as though it could be a good investment. Although the risks remain high, there could be substantial growth potential.
This positive outlook may surprise people who do not follow Africa closely. In the popular imagination, the idea of Africa has long conjured up tragic images of emaciated victims of famine in Ethiopia. More recently, the hyperinflation and repression in Zimbabwe and the civil conflict in the Darfur region of Sudan have been the most prominent stories making the news in the West.
It is important to put these events in their proper context. Africa is a huge continent of 54 countries, so it should not be a surprise that some regions are troubled. The more striking news is that the continent overall is doing well.
Africa’s growth spurt is starting from a pitifully low base. Some 41.1% of the population of sub-Saharan Africa lives on less than $1 (50p) a day, according to the latest figures from the World Bank. Much of Africa has simply moved from extreme poverty to slightly less extreme poverty. It is a move in the right direction, but it is not yet fast enough to have transformed African economies. The big question iswhether the continent’s recent rapid growth rate can be maintained. If it can keep going for perhaps another decade or more, the character of African economies is likely to transformed. To assess whether this is possible, it is necessary to identify the factors driving Africa’s present growth and then assess the possible barriers to development.
There is little doubt that the period from the mid-1970s to the late 1990s was awful for much of the continent. Economies generally grew slowly, if at all, and in some cases even contracted. The human cost of such economic stagnation was terrible.
Such slow growth led to the creation of what Paul Collier, the director of the Centre for the Study of African Economies at Oxford University, has called “the bottom billion”*. He argues that the world’s population of about six billion can be divided into about one billion who live in developed countries, four billion who live in developing countries and one billion who are becoming poorer. About 70% of the bottom billion live in Africa.
The statistics are stark. The average growth rate for the bottom billion was 0.5% per head in the 1970s, followed by an average annual decline of 0.4% in the 1980s and a decline of 0.5% in the 1990s. Collier estimates that by 2000 the bottom billion were poorer than they had been in 1970.
Michael Power, the investment strategist at Investec, says: “The backdrop was pretty awful.” The raw materials that were a key part of Africa’s economies became “commodities” and prices for many fell. Africa’s economies grew slowly as a result. “It was a graveyard for capital,” adds Power.
Many commentators, including Collier, also attach a large part of the blame to African governments. In their view, such regimes were often too weak or too corrupt to promote development.
Ironically, Collier’s notion of the bottom billion has become popularised, just as Africa’s formerly stagnant economies have started to grow. It is too early to say for sure that he is wrong about a billion people being caught in a poverty trap. But the longer rapid growth is sustained, the less convincing his theory will appear.
There is a broad consensus among fund managers and strategists on what has helped to reverse the situation. They vary in the points they emphasise, but the factors they identify are generally similar.
One is the rapid economic development of Asia (see page 30). As Asia industrialises and urbanises, its appetite for African raw materials increases. As a result, Asian development has had a positive effect on Africa.
Another factor often given credit for the improvement in Africa’s performance is debt relief. By reducing Africa’s debt burden, such initiatives have, so the argument goes, cleared the way for further development.
Political change is also regarded by many as a key factor in Africa’s recent growth spurt. The post-colonial generation of African leaders, from the 1960s until recently, is often regarded in retrospect as corrupt and wary of market forces. The new generation, in contrast, tends to be more pro-business and amenable to working with Westerners. Privatisation, which gives investors the opportunity to invest in African assets, is one outcome of this more pro-market mood.
Joe Rohm, a senior analyst at T Rowe Price, who specialises in Africa, adds that many members of the African diaspora are returning. Westerneducated businessmen are “bringing best practices back to Africa”. As a result, a new, more sophisticated African managerial class is emerging.
Whatever the exact forces driving it, the fact of the African growth spurt is not in doubt. The difficult question is whether it can be sustained.
On this, there tends to be a split between fund managers and economists. While fund managers acknowledge that investment in Africa can be risky, they are generally more upbeat about the sustainability of growth.
The recent annual report on the African economy by the United Nations Economic Commission for Africa was blunt about the key risk: “In recent decades, sparks of economic growth have often vanished as quickly as they have been ignited. The current growth momentum also rests on a very fragile foundation. The continent continues to rely on primary commodities whose prices have been major sources of trade shocks.”**
From such a perspective, the continuation of Africa’s growth spurt is far from given. It could, as such episodes have in the past, fizzle out. The keyis for Africa to diversify its economy away from heavy dependence on raw materials. But it is easier to proclaim the need for such diversification than for it to be achieved.
Fund managers, in contrast, tend to play up the possibility of achieving such diversification. It is true that they have a vested interest in talking up the possibilities of success. But at the same time they do have a coherent intellectual case for their bullish views.
Investec’s Power points out that the Asian growth dynamic still looks extremely strong. As a result, it is likely to continue to help drive African growth.
Others tend to be more pragmatic. Many fund managers say they are investing in mobile phone networks and financials, rather than concentrating on natural resource stocks. The rationale for such investment is that it is a play on the growth in domestic consumption and a rising middle class. Such investment should, in the view of fund managers, help them to escape from the strong cycles that characterise natural resource stocks.
Although Africa fund managers typically have an upbeat story to tell, it would be unfair to say they are blind to the risks. On the contrary, they seem keen to acknowledge the potential pitfalls. To the extent that there are differences between them, these tend to be on which risks they emphasise.
Jamie Allsopp of New Star concedes that investing in Africa “is a very risky strategy”. He points to Zimbabwe as an example of what can happen when things go wrong. Allsopp acknowledges that foreign direct investment could dry up, global growth could slow down and there could be political wavering.
For Rohm, “the biggest risk is political”. Many African states can be seen as “early-stage democracies”. For example, Nigeria, which is Africa’s most populous country, has just had its first democratic handover. Under such circumstances, political institutions can still be seen as fragile.
John Mackie, the head of African funds at Stanlib Asset Management in Johannesburg, emphasises liquidity as a more mundane, but perhaps more pressing risk. Finding buyers and sellers for African stocks can sometimes be far from straightforward.
Before concluding, it is necessary to put investment in Africa in a broader context. For a start, it is a diverse continent. For most people, “Africa” means the continent south of the Sahara. However, there are important markets in the region - relative to others in Africa - in Egypt and Morocco, for example. But many markets in North Africa are closed to foreign or private investors.
It should also be recognised that South Africa is far more developed than most other countries below the Sahara. Although it is an African country, its infrastructure is in many ways comparable to that of more developed regions. Also, countries adjoining South Africa, such as Botswana (population under two million) and Namibia (population just over two million), can, economically, be seen as its satellites.
But most striking is how tiny Africa is in global financial and economic terms. To the extent that it has large companies, most of them are listed in South Africa or on exchanges outside the continent. There are tentative signs that some large indigenous firms may be emerging, but these are still rare.
Frances Hudson, global thematic strategist at Standard Life Investments, is not opposed to investing in Africa in principle, but is sceptical about some of the stories told by Africa fund managers. For example, she acknowledges that mobile phones numbers are growing rapidly in Africa. But she thinks it could be easier to tap into such growth through global infrastructure funds than through investment in African stocks.
She also points to safer, easier ways to invest in Africa than going through local firms. A range of African stocks are listed in London or South Africa.
A similar caution about investing in Africa is apparent in the asset allocation of the Templeton Emerging Markets Investment Trust (Temit), one of the largest general emerging markets funds, managed by Mark Mobius. It held only 1.8% of its assets in Africa - all in South Africa - at the end of September. In contrast, its benchmark, the MSCI EM index, had 7.96%.
Perhaps this reluctance to invest directly in Africa underlines the continent’s quandary more than anything. Abstractly, it is easy to identify its potential. It has ample natural resources and, importantly, a population keen to enjoy the benefits of development. But given the tragic record of its recent past, it is not surprising that outsiders, and many insiders, remain wary.
For the next few years at least, the region is likely to remain a risky investment. It may reap attractive rewards or it may produce substantial losses. But if Africa manages to maintain its recent spurt for another decade or more - and it is an enormous if - the continent could be transformed. It will no longer be seen as a trap for the world’s poor, but instead be more akin to the rapidly developing countries of Asia. If Africa can achieve such a transition, it will be an huge boon to both the Africans and the world.
* Paul Collier “The Bottom Billion: why the poorest countries are failing and what can be done about it”. Oxford University Press, 2007.
** Economic Commission for Africa /Africa Union “Economic Report on Africa 2007: Accelerating Africa’s Development Through Diversification”, p9. Available at: www.uneca.org/era2007
Tapping into the African boom
Several groups have launched funds to take advantage of the booming African economy (see table below). Although they are not recommended for those of a nervous disposition, their minimum investments are often low enough to be accessible to ordinary investors.
The most mainstream group - at least from a British retail perspective - to announce an Africa fund recently is New Star. Its Heart of Africa fund, which will invest in sub-Saharan Africa, excluding South Africa, will have a minimum investment of GBP12,500. Its manager, Jamie Allsopp, already manages the New Star Hidden Value fund. The latter currently has a weighting of almost 9% in African stocks, although, unlike the Heart of Africa fund, it avoids locally listed companies in favour of those listed in Britain, Canada and South Africa.
The fund with probably the lowest minimum investment is the T Rowe Price Africa and Middle East Strategy fund at $15,000 (GBP7,500). The American fund giant’s product is part of its Luxembourg-domiciled range.
A more specialist group with an Africa fund is Charlemagne. Its Magna Africa fund is domiciled in Luxembourg and has a minimum investment of GBP10,000 on its B Shares.
Stanlib, Standard Bank of South Africa’s asset management arm, has launched two funds, each with a minimum investment of $50,000. Standard South Africa Equity invests in the South African markets, while Standard Africa Equity invests in 16 equity markets across the continent, including Egypt, Kenya, Morocco and Nigeria.
The Lyxor ETF South Africa fund has no minimum investment. Like other exchange traded funds, it trades like shares. It is listed on the London Stock Exchange.
Investec Asset Management, another subsidiary of a South African group, takes a different view of Africa funds. Its range of Guernsey-domiciled funds has a minimum investment of $1m. Michael Power, the group’s strategist, says the rationale for having such a high minimum is that investing in Africa, even in listed companies, is often more akin to investing in private equity.
For those with a truly strong constitution, there is the Zimbabwe sub-fund of the Imara Africa series. Investing in what is currently Africa’s worst-performing economy is obviously hugely risky. On the other hand, if the economy recovers, massive gains could be made.
The success of these funds is likely to be tied to whether Africa manages to sustain its economic boom. If strong growth continues, many African companies are likely to benefit. But if the growth spurt peters out, the environment could prove to be an inhospitable one for the new breed of African company.
However, even without spectacular growth, there is one important reason why Africa could be seen as an attractive investment destination. Both African currencies and markets tend to be uncorrelated with Western markets. They can, therefore, play a role in helping Western investors find a more balanced portfolio. As John Mackie, the head of African funds at Stalib Asset Management in Johannesburg, says: “They’re a diversification play.”
How Asia fuels Africa’s growth
A key factor driving Africa’s recent rapid economic development in recent years is the growth of Asia, and China in particular. African resources are feeding Asia’s massive appetite for raw materials to serve its growing industrial base and improving infrastructure. In return, African nations are hoping that Asian countries will help them to build their own much-needed infrastructure.
The trend is clearly illustrated by the composition of China’s trade with Africa. In 2006, three-quarters of Africa’s exports to China were raw materials, according to a study by Jian-Ye Wang, an economist at the International Monetary Fund (IMF).* Some 62% was fuel, while another 13% was classified as crude materials. Only 8% was classified as manufactured goods and 17% as “other”.
Africa’s imports from China are different in composition. Some 45% are manufactured goods, 31% machinery and transport equipment, and 24% “other”.
Fund managers have certainly noticed the growing importance of China in Africa. Jamie Allsopp of New Star says: “China is playing a serious role in Africa.” Joe Rohm at T Rowe Price points out that “China’s presence on the continent is very visible”. Rohm says wherever you travel in the region, you see signs of a growing Chinese influence.
Trade is easily the most important component of the relationship between the two sides in dollar terms (see table). Trade volumes dwarf the amount accounted for by official development assistance, debt relief or foreign direct investment. Only contracted projects came near comparing to trade levels in 2006.
From the perspective of anyone concerned about Africa development, it might be expected that the evolving ties with Asia would be welcomed. It seems like a win-win situation, with both Africa and Asia benefiting. However, some commentators are worried that China could undermine the Western human rights agenda in Africa. Whereas the Chinese agenda in Africa is commercial, many Western governments and agencies see their key role as promoting democracy in the continent.
The conflict is probably most intense in relation to Sudan. For China, it is one of its most important trading partners in the region. For many Western governments, in contrast, the Sudanese government is at least partly responsible for the conflict in Darfur.
Tension came to the fore last month, when China announced a $5billion (GBP2.5 billion) investment in the Democratic Republic of Congo. In return for raw materials, the Chinese offered to fund roads, railways, hospitals and clinics. The Financial Times comment: “Beijing has thrown down its most direct challenge yet to the West’s architecture for assisting African development” (September 29, 2007).
There are also some who argue that China’s influence in Africa can be exaggerated. A study by Erica Downs, a fellow of the Brookings Institution in Washington DC, quoted an authoritative estimate that China’s national oil companies accounted for 8% of the combined commercial value of international oil company investments in African oil. They also accounted for only 3% of all companies invested in African oil.** Her point was not that Chinese oil firms are unimportant in Africa, but that the big Western oil companies are still substantially more influential.
* Jian-Ye Wang “What drives China’s growing role in Africa?” IMF Working Paper 07/211. Available at www.imf.org
** Erica S Downs “The fact and fiction of Sino-Africa energy relations” China Security 3(3) Summer 2007.
Available at www.worldbank.org
