In the first seven months of this year Africa saw $8,2-billion of new listings, already 13% higher than last year.
Moreover, Nigeria, not South Africa, was the largest recipient of inflows for new listings. Africa has seen foreign investment inflows triple in the past decade from $10-billion to $30-billion a year.
Examining recent developments, it is not surprising that finally Africa is coming on to the radar screen of foreign investors.
Political and economic stability has resulted in GDP growth for the continent at 5,8% this year and market performances are outstanding, with countries like Nigeria showing returns in excess of 100% in dollars.
Since 1995 there has been, at least, one African equity market among the top 10 best-performing markets in the world. And it is not only oil and other resources that are fuelling growth. Some favourite picks in the Investec Africa fund include Egyptian cellphone provider Orascom and Nigeria’s Access Bank.
Thabo Khojane, Investec Asset Management’s MD in South Africa, said Orascom has seen a 100% growth in its subscriber base this year. Since 2005 it has grown its subscriber base from 15-million to 50-million. Khojane said the growth rate is sustainable, making its current PE of 12 times not unduly expensive.
In Nigeria bank consolidation has been a major theme with the number of banks decreasing from 89 to 25 in two years. Access Bank grew its bottom line 500% this year and is growing its loan book at 100%. No wonder Standard Bank is targeting Africa for acquisitions.
Investec launched its Africa Fund two years ago and inflows have been way ahead of expectation. “When we launched we considered that having inflows of $500-million to $1-billion within five years would be a real achievement. In two years we have already had inflows of more than $500-million, with a further $250-million committed to the fund,” said Khojane.
Even countries such as Zimbabwe are attracting attention. Imara’s Zimbabwe fund had to be closed temporarily in April because the demand was overwhelming with $9-million flowing in the first two weeks after launch.
There has been a switch in the type of investor looking at Africa from high-net-worth European and United Kingdom individuals to more institutional investors, including the United States.
Investec is hosting a group of trustees from US retirement funds coming to check out Africa. They represent massive local government retirement funds and make minimum investments of $250-million.
While the appetite for Africa is growing, liquidity is not growing at the same pace and remains a constraint. However, commentators believe that as interest increases, so will liquidity. In the meantime the low levels of liquidity can go in investors’ favour. Africa has a low correlation to the rest of the world’s stock markets.
Alum Thomson, head of securities at Imara Holdings, said that while emerging markets might still offer higher returns than those in mature economies, they are usually subject to the same broad market trends and there is a high correlation between them.
However, this is not the case in Africa, which is locally focused, so a sub-prime blow-up in the US has little effect on its markets. For example, during the two major global sell-offs in March and July, which saw the US market down 5% and 7% respectively, Morocco was up during both periods, as was Ghana. Nigeria was down in the first correction, but up in the second, while Tunisia followed an opposite trend.
Apart from showing low correlation to global markets, the African markets have low correlation to one another. The correlation between Africa’s largest stock markets (excluding South Africa), namely Egypt, Nigeria and Morocco, have little or no correlation to one another.
Even countries within the same region have no correlation; for example, Egypt has a negative correlation to its neighbour Tunisia.
While Nigeria’s markets slowed down during elections earlier this year, it had little influence on any other African market. What this means is that an investment in an African fund is well diversified already in terms of investment returns.
While Egypt and Nigeria attract the most money due to the higher liquidity levels, Thomson said there is increasing interest in Zimbabwe; however, this is not for the faint-hearted. “A true speculator wants to get in as early as possible because when things come right, it will re-rate quickly and you might miss the boat,” said Thomson.
Botswana is probably the safest bet, but Thomson said you pay for lower risk markets by higher prices and Botswana is a bit expensive. In the past year, the Botswana markets returned 44% in dollars.
Thomson said Kenya is an attractive market with good performance and decent liquidity. Although some smaller markets such as Malawi and Zambia might look interesting, the low liquidity levels make it difficult to invest there.
Nigeria is one of the most liquid markets and has returned 102% to investors. Thomson said there is a lot of opportunity, but it comes with risk because Nigeria does not have the same levels of corporate governance and transparency as South Africa.
However, he said as Nigeria becomes a more popular investment destination, these issues are improving. There are big names listed in Nigeria such as Guinness, Unilever and Nestlé. “These are good names with foreign management interests,” said Thomson.
Khojane said Investec’s Africa fund also has exposure to Tunisia, Morocco, Kenya and Mauritius, the latter two primarily for their tourism.
New funds pour in
The Financial Times reported last month on the rapid increase in Africa funds this year.
Pamodzi Investment Holdings had just announced the launch of a $1,3-billion pan-African private equity fund backed by United States investors. The report said that since the start of the year more than $2,03-billion had been raised by private equity funds in London. Since June, three funds, raising close to $400-million, have listed on the London Stock Exchange.
The Financial Times said hedge funds have been drawn to the region, with higher estimates of their exposure to Nigeria alone running to $1,5-billion. It reported that Tudor Investments and Millennium Partners are backing newly listed Africa Opportunities Partners, which is seeking to pick up a stake in a Tanzanian brewery, a fixed-line Senegalese telecoms company, an Egyptian insurer and a West African oil and gas services company.