Recent confidence in Africas assets proved misplaced
as the markets dramatic fall demonstrated. But
some investors remain loyal.
For years, Africa was a continent off the radar of most
international money managers. Instead, it was the preserve of
highly specialized private equity funds and a handful of
low-key regional investors.
By 2005 that had changed. As an increasing number of countries
began putting their fiscal houses in order and stabilized
politically, mainstream investors often in droves
discovered for the first time an attractive risk-return
trade-off across the continent. The far-reaching and
pervasive changes in sovereign governance on the continent
changed the way many African economies operate, notes
Roelof Horne, manager at the Investec Africa Fund.
Africa also appeared to be somewhat insulated by what many
believed were its more tenuous financial linkages to the rest
of the world; and some optimistic bankers and investors even
suggested it would be immune from global financial turmoil.
In 2007 a slew of funds launched to cash in on the rebounding
sentiment. Among them were South African based Investec,
Stanlib and Coronation funds (Stanlib also launched a fund in
Europe under the Standard Bank brand), as well as the
high-profile New Star Heart of Africa Fund in London.
Fund managers also looked to set up Africa debt funds, even
though supply was limited: as most African sovereigns had
restructured their debt, only Ghana and Gabon were issuing
Eurobonds. But faith in African banks and corporates meant that
some established names could issue debt. For example,
Nigerias Guaranteed Trust Bank issued a five-year
Eurobond fixed at 8.5% despite Nigerias vastly
overcrowded banking sector.
But this overconfidence in African assets was naive and, it
turns out, short-lived, analysts say. Stuart Culverhouse, chief
economist at Exotix, a boutique investment bank, notes that
even if there had been no direct impact from the US housing
crisis, Africa was always in the firing line because of the
crisis impact on capital flows and commodity prices, as
well as the inevitable fallout on stock markets.
The price to earnings ratios of African markets, according to
Stephane Bwakira, manager of the Standard Bank Africa Fund, has
fallen from 20 to seven times earnings over the past 12 months.
His fund has lost two-thirds of its value in this period.
It has not been alone. New Stars Heart of Africa Fund was
down 52% by February 2009 from its launch in November 2007.
Withdrawals had been so heavy it proved impossible to
sell the underlying shares fast enough to meet withdrawals
that it suspended dealing in December. On April 6, New
Star sold the remaining assets in the fund to London-based
alternative manager the Duet Group. They will be used to form
the core of the Duet African Opportunities Fund.
John Green, head of Investecs global distribution, says
it is essential
to have a core of loyal investors in such a specialized fund,
focused on illiquid markets. We are lucky that the loyal
institutional client base who did not come into the fund
just because its a hot sector have been loyal to
us. We do not target the typical mutual fund investor, and we
have only monthly trading.
So Africa has pleased neither investors looking for high
corporate stories nor those looking for low correlations with
world equities. But this does not mean that neither will
Mark Mobius, executive chairman of Templeton Asset Management,
says the fallout of a major global crisis is necessarily
universal, so its hardly surprising that disparate and
uncorrelated markets are feeling the shock.
But when looking at frontier markets such as Africa, we
have found the correlation with developed markets to be very
low over the long term, and we expect that to continue.
About 40% of Templetons Frontier Market Fund is invested
Bearing the brunt
For now, Africa is feeling the brunt of the world economic
crisis. A sharp fall in copper prices slammed Zambias
economy and upended its currency, the kwacha; a collapse in
diamond sales hit Botswana particularly as key mines
such as Jwaneng were closed for several months.
Botswana, once among Africas most stable economies, is
likely to slow sharply as much as 7% of GDP this year. A
decline in tourism has had a sharp impact on the Mauritian
economy; although the island nations banking shares are
down a modest 4% in the year to date, tourism is down 47%.
The fall in the oil price was one of the main reasons that
Angola shelved plans to set up a stock exchange. Enabling
legislation for the bourse was passed in 2005. In February 2006
Antonio Cruz Lima, the industry minister, announced that a
stock exchange would open by the third quarter of that year
with 10 companies with an expected market capitalization of $6
But by last August, cabinet heavyweight Aguinaldo Jaime
announced that setting up a stock market would be a
problem for the next government. Angola is now one
of just three SADC (Southern African Development Community)
countries without stock exchanges, the others being Tanzania
and the Democratic Republic of Congo (DRC). John Mackie, head
of Stanlib Africa in Johannesburg, says only a clear and
unambiguous commitment to the privatization of state assets
could have salvaged the initiative.
On the upside
But Standard Bank Africa Funds Bwakira believes the fall
in commodity prices is easily overstated. Services and
agriculture still account for over 50% of the continents
GDP. The focus of the fund has moved towards domestically
driven shares rather than those tied to the global economy. The
regions top 10 include three cell phone companies,
Mobinil in Egypt, Safaricom in Kenya (which just two years ago
bought the largest IPO initial public offering in
African history) and Celtel in Zambia.
John Mackie of Stanlib says that there are limited ways for an
investor to play Africas primary consumer theme
food and food security but the fund owns Zambeef, as
well as Illovo Sugar. Separately, he estimates that Nigerian
banks are trading at 60% of book value while in Botswana
they can still trade at six or seven times.
Nigerias financial sector represents a dark spot among
regional markets, having been hit hard by risk aversion and
waning confidence. Investors failed to meet their margin calls,
leading to a spiral down in shares that saw the market lose
over 70% of its value from its peak, 40% in the first quarter
of 2009 alone. The banking sector is down by 90%.
But Mobius notes that African per capita income is still on the
rise and with it greater consumer exposure to credit and the
money economy, which in turn should lead to a higher demand for
durable goods and quality clothing. Across the continent
defensive consumer shares, such as cell phones, breweries and
food, have fared better than financials.
The IMF predicts a 3% increase in Africas GDP in 2009,
followed by a more robust pick-up in growth the year after.
Mobius says that the trend towards improved infrastructure and
the growth in local consumer markets as people move up the
economic ladder will continue, even if commodity prices stay
depressed. The top African picks in his Frontier Market Fund
include MTN (the largest mobile phone business in the Africa
and Middle East region), British American Tobacco Kenya and
East African Breweries.
Investecs Horne is a big investor in Benue Cement Company
(BCC) in Nigeria. The market has been open for a year, but
BCCs sales have not been affected by competition from
imports, because of the devaluation of the naira, the high cost
of road transport and limited rail links in Africas most
Horne believes that as continued industrialization and
urbanization drive real estate development and much needed new
infrastructure, demand for cement in Nigeria will increase even
if the overall economy slows.
But there are other structural drivers of Africas growth
dynamic, key among them governance reform. Culverhouse says
that improvements in governance will on balance endure, even
through the bad times. If it was froth in the good times,
and governments revert to bad habits, then Africa will be in
trouble. But if it keeps its nerve, with some help from rich
donors the region will get through it.
Will investors recover their confidence too? That depends
partly on how exposure to Africa is managed, notes Mobius. One
way, of course, is to invest through a broader based fund, such
as the Templeton Frontier Market Fund (there are not yet any
frontier market index funds).
But at the end of the day, frontier markets will only appeal to
investors with a longer time horizon and an appetite for
risk. Such cannot be said for New Stars investors, who
rushed for the exit at the first sign of trouble.