/ 22 October 2007

Africa: The next big thing

Booming stock markets, bustling city centres, huge reserves of natural resources and soaring economic growth. Welcome to the new Africa. Last week one of Britain’s leading asset managers, New Star, became the first to launch a fund that will invest solely in the countries of sub-Saharan Africa outside South Africa.

A continent often known for poverty, famine and dictators is now being sought out by finance experts who think it could be the next great investment opportunity. Poverty and malnutrition are still rampant across the continent, but the signs of improvement are encouraging.

In 2003 there were 17 African countries in which the economy was shrinking, but today that number has fallen to six. The number where growth per head is higher than 3% has jumped from 18 to 25.

According to the Organisation for Economic Cooperation and Develop­ment (OECD), Africa’s annual GDP growth has averaged about 5% annually over the past six years and is forecast to hit 6,7% in 2007.

So what’s behind the growth? Two factors stand out: oil and China. Oil reserves in Africa make up 7% of the global total and production is expected to double from six million barrels a day over the next two decades. Oil imports from Africa (princi­pally Nigeria and Angola) now account for a greater share of American oil imports than the Middle East.

Yet China is becoming more important than the United States. Its voracious demand for resources has pushed up commodity prices and seen it turn to Africa as a source for raw materials.

China’s President Hu Jintao has promised to double aid to Africa by 2009. He wants China’s $40billion annual trade with Africa to grow to $100billion by 2020. Critics accuse China of treating Africa as a colonial territory and backing regimes with poor human rights records.

Jamie Allsop, manager of New Star’s Heart of Africa fund, says there are signs of “trickle down”, but he acknowledges that progress is slow. “When I first went to the Congo, virtually everyone was on foot; now there are a lot of bicycles and scooters. The big mining companies that have built schools and hospitals and tarred the roads are the ones that have tended to retain their licences.” The countries that impress him most are Nigeria, Kenya, Botswana and Mauritius. They have the most developed and liquid stock markets with about 50 companies that already have a market capitalisation of more than $250million.

Most of the investment opportunities, he says, are in telecoms, consumer staples and infrastructure. Some of the best value companies are in Kenya, where Nairobi is a fast-growing business hub for East Africa.

Allsop likes MTN, which is expanding fast in Nigeria, where 20% of the population, Africa’s largest, already own a cellphone. He has also invested in Sonatel, which operates in former French colonies Senegal and Mali. “It’s on a yield of 5,6%, sells on 12 times earnings and has a 50% operating margin,” he says.

A lot of the consumer staple names will be familiar — Guinness Nigeria and Unilever Ghana. These stocks tend to have a local listing with the parent group having a controlling shareholding.

New Star is not the first to set up an Africa fund. In South Africa, Investec and Standard Bank offer Africa-based funds. Critics say the idea is too risky for anybody who is not wealthy. Andrew Gadd of IFA group Lighthouse says: “I wouldn’t touch it with a bargepole, unless you have an appetite for high risk.” He adds that he is concerned about the accuracy of company accounts and reporting standards.

New Star says: “We believe this fund is high risk and therefore only suitable for investors who are able to bear the loss of all or part of their capital.” — Â