Africa’s ‘lion economies’ wake from their slumber

Civil war, famine, disease. For readers of a certain age, those are the images that come to mind most readily when thinking of Africa. But while there is sadly still some truth to these stereotypes – poverty and corruption remain widespread – things are quietly improving for the continent, and the future looks even brighter.

In the last decade, Africa’s economy has been growing by 5% a year. Some of the most rapid-growing ‘lion’ economies have outpaced their ‘tiger’ counterparts in Asia. What’s more, while China is now constrained by rising labour costs and terrible demographics, Africa has a growing population and an appetite for further economic reform.

Economic growth has also seen the emergence of a growing African middle class. Three-fifths of the overall population still earns less than $2 a day (adjusted for purchasing power parity). But the proportion on between $2 and $20 has shot up from around 25% to more than 34% in the past ten years.

These people are eager to buy consumer goods, including global brands, which in turn has increased the need for infrastructure, such as roads, rail and ports, connecting Africa with the rest of the world.

Africa’s advantage: demographics

Africa’s birth and death rates have always been high. But access to basic public health care, especially maternity care, has improved in recent years, which has slashed infant mortality. Twelve countries are on track to meet the goal of cutting child mortality by two-thirds from 1990 levels, reports the World Bank. Kenya, Senegal and Rwanda have gone beyond this, with mortality rates that are now comparable to those of India.

There were fears that the Aids epidemic would undo these advances, and that life expectancy would continue to decline, as it did in the 1990s. However, greater awareness and availability of better antiretroviral drugs has reduced the spread of the disease.

Between 2001 and 2009, the proportion of Zimbabwe’s population with HIV/Aids fell from 23.7% to 14.3%. Life expectancy in sub-Saharan Africa is now rising again, having gone from 50 to 54 years in the last decade.

Meanwhile, despite falling mortality and rising wealth, Africans are still having lots of children: in many countries birth rates have stayed static, or even gone up. The world average fertility rate is 2.5, barely above the ‘replacement level’ of 2.1. But the average African woman has 4.7 children, rising to 5.2 in sub-Saharan Africa. This means the population of the continent, especially below the Sahara, is set to mushroom, from 1.05 billion today, to 1.44 billion in less than 15 years’ time.

For example, Nigeria, with 162 million people, is already the seventh-largest country in the world, behind Pakistan. By the middle of this century, it is expected to have grown to 433 million, pushing the US into fourth place. Longer-range forecasts suggest that, by 2100, Nigeria’s population could rise to more than 700 million.

To put that in context, China’s population is expected to fall below 950 million in the same period. Tanzania and DR Congo meanwhile are expected to be the fourth and fifth most populous nations by the end of this century.

In short, Africa has some of the healthiest demographics in the world. Western European and Asian policymakers are grappling with the social and economic costs of ageing populations, with nearly a quarter of Japanese and over a fifth of Germans aged 65 or over. By contrast, only 3% of sub-Saharan Africans are in this age group, while nearly half are under 15.

Improving governance

Another major boost to the continent has come from better governance. Hard as it may seem to believe, sub-Saharan Africa is becoming a more peaceful place. There are half as many civil wars today as there were two decades ago, and the remaining insurgencies are less violent. Even the notorious Lord’s Resistance Army in Uganda is a fraction of the size it was in the 1990s.

Democracy is also taking root. In 1989, American think-tank Freedom House classed only three sub-Saharan African countries as fully ‘free’, with 70% ranked ‘not free’. Now nine countries (Benin, Botswana, Cape Verde, Ghana, Mali, Mauritius, Nambia, Sao Tome and South Africa) are in the top category. Add in ‘partly free’ countries, and three-fifths of the states have a level of political freedom and civil liberties that was virtually unknown decades before.

African countries are also increasingly willing to promote democracy outside their own borders. While the African Union (AU) proved unwilling to dislodge Robert Mugabe in Zimbabwe, the AU and ECOWAS (the Economic Community of West African States) have both intervened to prevent coups. ECOWAS this year used sanctions to convince Guinea to hold presidential elections.

Regional economic cooperation is also increasing, with countries working to slash direct and indirect trade barriers. For example, Burundi, Kenya, Rwanda, Tanzania and Uganda have successfully formed a common market, the East African Community. Particularly encouraging is the fact that more African politicians acknowledge the need for further improvements.

Mark Mobius, who runs the Templeton Africa Fund, recounts that “on a recent visit to Nigeria, I sat down with a prominent government official who, instead of trying to sweep their history of corruption under the rug, candidly discussed how they are trying to clean it up”. He thinks that “many leaders are waking up to the fact that corruption must be squashed in order to prosper on a global scale”.

Africa’s new passion for brands

Improving demographics and increased political stability have seen the African middle class grow rapidly. Around 90 million households now earn more than $5,000 a year (adjusted for purchasing power parity). That’s significant, because it’s the point at which income starts to move to consumer goods and services, rather than just food and shelter.

One sign of this is the rapid growth in mobile-phone ownership. The United Nations Conference on Trade and Development estimates that growth in mobile usage is higher in Africa than anywhere else in the world.

Consumers are also becoming interested in brands for the first time. Drinks company Diageo notes that consumers are “trading up from the illicit to the formal sector, and within the formal sector people are trading up to more premium brands”. Overall, notes McKinsey, consumption has grown more in Africa than in India or Brazil over the past decade. Total consumer spending in the continent is set to hit £900bn by 2020.

This new prosperity is changing the way people shop. For the wealthiest new consumers, shopping malls have begun to spring up, with the Palms in Lagos and Westgate in Kenya the most prominent. For the rest of the population, the big story has been the rise of supermarkets.

Food shopping in sub-Saharan Africa used to be based around market stalls, but the past decade has changed this. International chains, such as Carrefour, Spar and even Wal-Mart (via its ownership of Massmart), are entering the picture. But many of the top firms are African.

One example is South African chain Shoprite, which has 1,200 branches around the region. On a smaller scale, other companies run their own speciality stores, with Zambian meat company Zambeef running a chain of butchers, and Shoprite’s meat counters.

Consumers with disposable income also mean rising demand for financial services. David Mataen notes in Africa: The Ultimate Frontier Market that, while this used to be limited to taking in short-term deposits, banks are experimenting with lending. Recently, this has expanded in scope to include “mortgage finance, home improvement loans, car loans and credit card loans”.

Mataen argues that African banks have learned lessons from the woes of their Western counterparts, resulting in very low default rates. African firms are also developing new technologies to accelerate the spread of banking services.

For instance, Net 1 UEPS Technologies has helped develop low-cost systems that enable South African firms and individuals, even in previously unbanked areas, to make and receive electronic payments. It now reaches 65% of retailers in the formal sector through a mix of smartcard and mobile payment technology.

Building a better Africa

To encourage this growth to continue, African countries need to spend more on infrastructure. Kola Aluko, the deputy chief executive of Seven Energy, notes that “infrastructure – particularly in the sub-Saharan region – still lags behind the rest of the developing world”.

If transport links were better, African factories could increase their size, taking better advantage of economies of scale. Indeed, if you exclude the cost of transporting goods and regulation, African producers would be as efficient as those in China or India.

To catch up with Asia, the World Bank and the African Development Bank (AfDB) reckon the continent needs to spend an extra $90bn a year, equal to 15% of GDP. While the AfDB thinks official statistics understate current investment, which it puts at $45bn, this still means that spending will need to double. And a third of the $90bn will need to be spent on maintenance.

However, because existing infrastructure is so inadequate, it does mean that any extra investment is likely to deliver high returns, boosting Africa’s annual growth rate by up to 2%. Indeed, the World Bank reckons that projects already carried out between 1990 and 2005 added an extra 1% growth per year.

Governments and funding agencies are already working together to address this problem. The AU and AfDB have set some ambitious targets. They plan to create a 37,200 km highway network, along with 30,200 km of railways and 16,500 km of interconnected power lines by 2040. They also plan to expand hydroelectric power generation massively, and increase port capacity by 1.3 billion tons.

Of course, as Mobius points out, “most infrastructure development is under government auspices”, so it’s hard to invest in directly. But this doesn’t stop the private sector being involved in other ways. Mobius thinks that makers of heavy equipment and raw materials used in construction should benefit. For instance, conglomerate Lonrho has developed prefabricated buildings that can dramatically cut the cost and building time of houses and offices.

Meanwhile, the poor quality of roads is a great opportunity for other forms of transport. Herman Carpentier of Brussels Airlines, which is investing in the Congo, thinks there is ‘real demand’ for air travel in sub-Saharan Africa. Rivals agree: British Airways, Emirates and Air France have also entered the sector, either directly or through subsidiaries.

While more than 80% of traffic is carried by international airlines with state-owned companies accounting for much of the remainder, there have been attempts to launch private domestic firms, such as FastJet.

The best investments to buy now

South African supermarket and consumer conglomerate Shoprite (OTC: SRHGF) is one of the major African shopping chains. Sales are booming, with turnover growing by 14% from 2011 to 2012. While Shoprite (not to be confused with the American chain of the same name) isn’t listed on a major British or US exchange, you can buy American Depository Receipts (ADRs) in the company ‘over the counter’.

ADRs are rights to foreign shares which can be used as a way to own the shares, without having to go to the trouble of buying them on their home exchange.

However, there’s an even easier way to get a piece of the African consumer boom: through the Zambian food company Zambeef (LSE: ZAM). Zambeef is vertically integrated (in other words, it has its fingers in pies all the way up and down the supply chain): it owns farms, food processing plants, a network of stores and even a fast food chain. It also runs meat counters in a number of Shoprite supermarkets.

Broker Panmure Gordon notes that it is enjoying “strong demand growth for all product lines”, and has a strong brand and market position in Zambian agribusiness. Zambeef currently trades at ten times forward earnings. Panmure has a price target of 45p – an upside of 20% from here.

On the financial side of the consumer boom, Net 1 UEPS Technologies (NASDAQ: UEPS) specialises in services that allow individuals, companies and governments to process payments and transactions. It operates in a number of markets, including South Korea, but derives half its revenue from South Africa. Revenue is growing strongly, rising 75% between 2005 to 2011, and it has relatively low levels of debt. Yet it trades at a relatively low price/earnings ratio of nine.

The easiest way to play the infrastructure boom in Africa is to invest in conglomerate Lonrho (LSE: LONR). Operating in 18 countries, all of them in sub-Saharan Africa, it supplies infrastructure and logistics services to the agricultural sector, construction industry and oil and gas firms.

BPI Capital Africa predicts “skyrocketing earnings growth”, with earnings per share expected to more than quadruple from 49p to 206p between now and 2014. If correct, this means Lonrho is currently trading at only 5.3 times profits two years hence. In short, “the risk profile is high but the potential reward is considerable”.

A related investment is the airline FastJet (AIM: FJET). A spin-off from Lonrho (though the parent company still retains a substantial stake), it aims to become the first budget pan-African airline. To achieve this it has recently hired senior executives from budget airlines in Europe, including RyanAir, and the Arab world.

It has also expanded its fleet of aircraft, leasing Airbus jets. The involvement of Stelios Haji-Ioannou, the founder of EasyJet, means that the carrier will benefit from his expertise, though he will not be involved in day-to-day management.

If you prefer not to risk buying individual stocks, there are several Africa-focused funds. Most focus on commodities, or limit their investments to South Africa, the most liquid African market. One exception is the Templeton Africa Fund, run by Mark Mobius.

The portfolio includes firms like Anglo-American, but other large holdings are Kenya Commercial Bank and First Bank of Nigeria. Nearly 40% of the fund is invested in the financial sector. That might sound worrying, but the growing demand for consumer finance, and lack of exposure to sovereign debt, means African banks look sturdier than their European counterparts.

  • dlp6666

    Bit surprised no mention here of Agriterra (LSE:AGTA) [beef and food distribution in Mozambique etc.] – only recently discussed/’tipped’ by Merryn and Bengt at MoneyWeek (and David Stevenson in the FT).


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