John Mackie, manager of Standard Africa Equity, says the fund should gain 25-30% this year – with financials, resources and tourism among his favourite themes in this burgeoning market.
Just when you thought it might possibly be safe to put money into a fund investing in Africa, it just has to go and mess up.
That might be what investors are thinking in the wake of last year’s Africa launches from StanLib and New Star, now that one of the continent’s leading markets, Kenya, has descended into political turmoil. But the surprise is how little the strife in Kenya has hit the Nairobi stockmarket.
Soon after the results of the election were announced and rioting began on the streets, the exchange was shut for trading. It managed to open for one hour then closed again. One might imagine that when it opened again, prices would be marked down dramatically. Yet the market is down just 5%.
John Mackie, the Johannesburg-based manager of the Standard Africa Equity fund, says: “For the first few days nothing really happened as the market was only open for one hour. Since then it came off a bit, and the currency weakened, but it’s interesting how much it has corrected since. It’s about 5% below where it was before the turmoil began.”
Mackie is genuinely concerned about the fate of individuals caught up in the tumult and is uncomfortable about discussing either strategies for exiting the country or hunting for bargains amid the chaos. “Clearly what has happened in Kenya is a tragedy of immense proportion. What is going on is unacceptable and the consequences of not finding a solution do not bear thinking about.
“As a fund manager, I am looking for opportunities all the time. But you have to very careful of talking about opportunities when people are dying. There are a lot more important things than just investment opportunities.”
He admits that developments in Kenya have been “a real shock” given the strides the country has made. “My initial take on Kenya was highly positive. The GDP story was looking great and it was becoming a regional powerhouse.”
Indeed, Kenya featured heavily in promotional material and manager comment during the launch of the New Star fund, which took more than £50m, and the StanLib fund, which has raised $100m (£51m) in less than six months.
This time last year, as my Guardian colleague Xan Rice reported, the hottest show in Kenya was taking place every weekday morning in a dark auditorium on the first floor of a central office block in the capital. Kenya had gone share crazy. The incredible performance of the Nairobi Stock Exchange (NSE) was the talk of the country. From 2002 to 2007, the main NSE index rose 787% in dollar terms, according to Standard & Poor’s, making it one of the world’s best performing markets.
So should we now agree with the view of one IFA I interviewed at the time of New Star’s launch who said he wouldn’t touch Africa funds? Mackie first points out that even though Kenya received much of the attention at the time of the fund launches, it was only a tiny part of his portfolio.
“The Standard Africa Equity fund only has 3% of its holdings in Kenya and what the situation has demonstrated is the merit of diversifying investments so that we can maximise on the strength of the underlying story of investing in Africa.”
That underlying strength, says Mackie, is evident in the staggering growth in foreign direct investment (FDI), much of it from a China hungry for resources. The total amount of commercial investments announced for Africa since the fund was launched last summer comes to $66 billion. That compares with a total FDI flow of $100 billion into Africa since 1960. “So it is no exaggeration to say that almost 75% of the total foreign aid inflows into Africa since 1960 have been matched by commercial inflows into Africa announced in the last three months of 2007 alone.”
Mackie lists just some of the projects that China began financing in 2007: $3.3 billion in Gabon to gain access to iron ore reserves; $900m into Zambia’s new special economic zone; $660m for a hydroelectric scheme in Ghana; $500m in the Congo for roads to gain access to minerals. The projects go on and on, making domestic disputes in Kenya irrelevant. “Infrastructure plays will be huge over the next few years,” he says, and he expects Chinese demand for raw materials to remain robust throughout 2008. His preferred African resources stocks include Equinox Minerals, a mid-size Zambian copper producer, and Albidon, a nickel explorer.
Despite Kenya’s woes, the fund enjoyed a dollar gain of 25% in its first six months, and Mackie remains confident that gains of 25-30% should be achievable in 2008. Standard Africa Equity can invest in up to 16 African equity markets but Mackie is focused on Nigeria and Egypt.
“We are most overweight in banking and financials, which make up 37% of the fund, and we expect to see this sector grow over the year. We have seen banks and insurance companies in Nigeria, which are growing their earnings between 50% and 100% per annum.”
Like most emerging market banks, African financials managed to steer clear from any exposure to subprime woes. Mackie picks Nigeria’s Access Bank, Guaranty Trust Bank and First City Monument Bank as his preferred financial stocks for 2008.
International tourism is another of Mackie’s themes in the fund. Sadly, the Foreign Office is advising against anything other than “essential travel” to Kenya, and the events will hardly help bookings at one of the busiest times of the year for travel to the continent.
But Mackie says it will only mildly dent what he reckons will be double-digit growth in Africa’s tourist industry in the coming years. One of his favourite holdings is New Mauritius Hotels group, whose pre-tax profits were up 86% in the year to September 2007.
According to the Organisation for Economic Cooperation and Development, Africa’s annual GDP growth has averaged about 5% annually over the past six years and is estimated to have to hit 6.7% in 2007. Let us hope that Kenya’s woes won’t any further destabilise one of the more optimistic economic stories of the last few years.