Why Africa could be your next great investment

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It's not like the Nigerian tourist board needed any more bad press.

Three days after another attack on oil workers in the country's south, Nigeria went to the polls last week to elect a new president. As usual, Nigerians didn't really have much choice in picking their new leader. That had already been done for them.

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Ballots were stuffed, boxes were snatched and the opposition was intimidated at every opportunity, in what was deemed to be the most flawed election in the country's 47-year history as an independent country. Unsurprisingly, Umaru Yar'Adua of the governing People's Democratic Party (PDP) won 70% of the vote against 18% for his closest rival.

The news certainly won't help to change what Max King, co-manager of the Investec Managed Growth Fund calls the "huge bias" already built into emerging markets. "People love China and India, like Asia, are sceptical about Latin America and hate Africa."

Yet his colleagues at the Investec Pan African fund in South Africa have already achieved a 14.4% return for the first quarter of 2007, and 32.8% for the year. Clearly, there's a lot more to Africa than news reports would have us believe

So why have returns in Africa been so good, despite the corruption, the violence, the poverty and all the other hardships associated with the continent? Well the truth is, that much of Africa is doing quite well for itself, even in countries well outside the resource sphere.

We've spoken about it here before here in Money Week, in a cover story by Merryn Somerset Webb in February (subscribers can read it here: Why you should join the new scramble for Africa). In 2006, equities in Morocco were up 75%, 69% in Uganda, 55% in Botswana and even in Zimbabwe, they rose 13.5%.

In Kenya, a country with few of the precious gemstones or fossil fuels that drive the economies of many of its neighbours, the stock market rallied 46%. As well as a growing agricultural industry and pragmatic policies adopted by its government, the tourism industry has become a big earner for that country. In 2006 the country's beach resorts and safari parks generated $803 million, up from $699 million from the year beforehand.

And in Nigeria, the stock market's capitalisation has doubled over the 12 months to March to about $45 billion. Indeed, Nigeria has been one of the best performers in Sub-Saharan Africa of late - the global sell-off in March virtually bypassed the country. Real GDP growth is provisionally estimated at 5.6% for 2006, according to the Economist Intelligence Unit, and set to remain strong in 2007 and 2008 at 5.4% and 5.6% respectively "on the back of rising oil production and strong non-oil sector growth," in areas such as banking, it says.

A report from Goldman Sachs this week was even more optimistic. It said that annual GDP growth had more than doubled between 2003 and 2006 to an average of 7.3% from less than 3% in the years beforehand. "The Nigerian economy has turned a corner over the past few years, and has enjoyed a stable macroeconomic environment and higher growth", said the investment bank. The country is now "much less vulnerable to adverse external shocks' because of recent agreements with the Paris and London clubs.

Those agreements allowed Nigeria to restructure its debt, cutting its debt to GDP ratio to 3% at the end of 2006 from 60% debt to GDP in the 1990s. Inflation was 7.7% in February this year, according to Goldman Sachs, from 12% in 2005.

When one considers that back in 1999 most Nigerians thought the country would return to military rule within no time, this is a pretty impressive achievement. Nigeria has now had eight years of uninterrupted democratic governance for the first time since independence in 1960.

You can read more about Nigeria's political situation in the current issue of MoneyWeek - if you're not already a subscriber, click here for a free trial: Free trial.

Unfortunately, because of that bias mentioned by Max King, it is still quite difficult for retail investors to put their money in individual African markets. Companies like Securities Africa have set up a new platform to allow investors to buy equities across 19 African exchanges, but they require a hefty deposit to do so. Other options like the Investec Africa Fund and the Imara African Opportunities Fund (See Imaraholdings.com) require large minimum investments, $100,000 in the case of Imara.

A good alternative is to invest in a western company like Lonhro or Shell, which we've tipped before here in Money Week, which have significant dealings in Africa. You can find out more on Lonhro in the cover story mentioned above.

As for Shell - Nigeria is the 6th largest exporter of crude oil in the world, and will soon account for 10% of US oil imports, so the importance of the sector can't be over-emphasised. Shell's share price has been punished in recent months for, among other things, its operations in Nigeria being threatened by rebels in the area.

However, this looks a good buying opportunity. Nigeria has a big incentive to repair relations with rebels in the delta. That's because the country is estimated to have lost around 570 billion naira ($4.4 billion) in oil revenue last year because of the disruption caused - that's about a quarter of output.

The administration has already made a conciliatory gesture to locals by appointing the state's head as vice presidential candidate, GoodLuck Jonathan. Many oil companies are also working to help out in the region and thus calm the local inhabitants - Shell spends $100m a year on social and health programmes in the delta.

On top of this, the shares trade on a forward p/e of just 9.5 and yield 3.9% - with exposure to a rising oil price too, Shell a tempting addition to any portfolio.

Turning to the markets...

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In London, the FTSE 100 closed deep in the red on Friday as miners and financials notched up losses. The blue-chip index was 50 points lower - at 6,418 - by the close and the broader indices were also lower. However, brewer Scottish & Newcastle was the day's stand-out performer with gains of nearly 7%. For a full market report, see: London market close.

Across the Channel, the Paris CAC-40 closed down 13 points at 5,930, whilst in Frankfurt the DAX-30 was off 8 points at 7,378.

On Wall Street, US stocks closed mixed. The Dow Jones added 15 points to close at 13,120, although risers only narrowly outweighed fallers on a day that saw the likes of General Motors and Intel slump. The Nasdaq gained 2 points to close at 2,557 on a good day for technology and software stocks, but the S&P 500 fell a fraction of a point to end the day at 1,494

In Asia, Hong Kong's Hang Seng index tumbled by 229 points to close at 20,363 today as concerns over Chinese growth weighed. In Japan, the Nikkei is closed today for the start of Golden Week.

Crude oil had fallen back to $66.20 a barrel this morning, whilst Brent spot was at $67.53.

Having gained $7 on Friday, spot gold had slipped to $678.30/oz this morning. Silver, meanwhile, had fallen to $13.48/oz.

Turning to currencies, the pound had fallen to 1.9903 against the dollar and was at 1.4648 against the euro. The dollar was trading at 0.7365 against the euro and 119.6 against the Japanese yen.

And in London this morning, a survey by Hometrack revealed that UK house prices advanced the most in almost four years in April, with London driving gains. The average house price in England and Wales saw an annual increase of 6.8% to £174,600. In other economics news, the National Institute of Economic and Social Research announced that it expects UK inflation to exceed the official 2% target until the second quarter of 2008 as a result of the Bank of England's decision to cut rates in 2005.

And our two recommended articles for today...

Why the silver price is set to soar

- Silver is probably the most undervalued of all asset classes, says Mark O'Byrne of Gold Investments. To find out why the metal looks likely to hit $50 in the near future - and how you can make sure you're best placed to benefit - click here: Why the silver price is set to soar.

The best ways to get back into Japan

- In 2006, the Japanese stockmarket disappointed with a mere 4% rise. But don't be put off, say Merryn Somerset Webb and Henry Scott Stokes. To find out why buying into Japan this year could be one of the best investment decisions you ever make, see this recent cover story, now available to non-subscribers: Why you should invest in Japan now.