Just a year ago, we heard Bob Geldof and Bono haranguing world leaders to relieve starving, Aids-ridden Africa of its debt at the G8 Conference at Gleneagles. Now, here at MoneyWeek, we are telling you that Africa is the place to invest. What's changed? We feel that the developed world's perception of Africa is lagging behind reality. There may be drought, disease and continuing corruption. There's no question that aid is still needed. But there is also a new generation of young, educated, savvy entrepreneurs running the continent's businesses. And opportunities abound.
Investing in Africa: a truly contrarian opportunity
Africa is a truly contrarian investment opportunity. Apart from South Africa, its most developed economy, it's completely off the investment map as far as serious money is concerned. But there are many reasons to like it. First, its economic growth is surprisingly healthy. GDP has been higher than the world average for five years, and is predicted by the World Bank to be 6% for 2006. Five of the world's ten fastest-growing economies are in Africa; Egypt was the world's best-performing stockmarket in 2005.
In February, Nigeria was given a formal credit rating by international bond agencies for the first time.
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Second, its mineral wealth is unsurpassed. Africa supplies half the world's diamonds, a third of its gold and more than three-quarters of the platinum/palladium precious metals complex. It has huge copper reserves in Zambia and South Africa. It has 12% of the world's oil reserves. The Sirte Basin in Libya is the biggest onshore reserve, holding 22% of Africa's 300 billion barrels; most future growth will come from tapping the deep water reserves off Nigeria and Angola.
It is also tackling its political problems. From 1960-1980, no African leader left office having lost an election. In the 1980s, there was just one. But from 1990-2003, 18 were voted out of office. Even the march of HIV is slowly beginning to lose momentum. Uganda has managed to cut the Aids infection rate from 30% in the 1990s to single-digit figures. The World Health Organisation estimates that 17% of those needing anti-retroviral drugs now receive them; that may seem pitifully low, but it's better than it was and better than expected.
Investing in Africa: China leads the way
A year on from the G8 conference, the World Bank has cancelled a further £20bn of debt, which will benefit 14 African states. But bigger by far than any contribution made by aid is the injection of cash from the world's
China (and its fast-growing neighbour India) are demanding ever-higher volumes of oil and minerals from Africa. In marked contrast to the G8 countries, China appears blithely unconcerned by human rights abuses though given its own record, perhaps we shouldn't be surprised. Two examples: US firms have been barred from investing in Sudan since 1997, but now 40% of Chinese-owned overseas oil reserves are located in the country. And China gave a $2bn low-cost loan in 2004 to equally oil-rich Angola. The International Monetary Fund was hoping to tie economic assistance to reform: around a quarter of Angola's state income goes missing each year.
So where China leads, should we follow? Well, yes in a manner of speaking. Mining, agriculture and tourism (MAT) are the flywheels' that drive every African economy, explains Michael Power, strategist at Investec Asset Management; they generate more than 80% of foreign exchange these countries earn.
Investing in Africa: tune in to the BBC
But this is not the route he would recommend for investors, choosing instead what he terms "tuning into the BBC" not the World Service, but Banks, Brewing and Cement. "In the wake of the privatisation wave that has recently washed over the Continent, one might add a T' for Telecommunications'," he says.
"These high-profile sectors tend to be the preserve of multi-nationals, or, in the case of oil and some minerals, the state.
The trick is to find a country where the three primary flywheels are spinning mightily, and then invest in companies that prosper from the consumer spending that is thrown off by these core activities." And he quotes the old adage: "Show me a mine and I'll show you a healthy brewery".
However, Power warns that the BBC & T sectors offer little or no protection against devaluation. "Where a nation is powering ahead, tune into the BBC & T rather than the primary generators of that power. But when devaluation threatens, either get out altogether, or, if you are brave and where you can, buy the primary MAT flywheels. There is nothing like a devaluation to rejuvenate a country's natural competitive advantages: ask Argentina."
"Africa's equity markets are definitely frontier markets," says Roelof Horne, manager of the Guernsey-based Investec Pan-Africa Fund. "You have to work a little harder but you will come across some hidden gem. Very few developed market players do invest on the African continent and only in the emerging markets index.
"Apart from good economic growth, the supporting fundamentals for businesses to operate are also improving, from politics, to economic reforms, to greater focus on infrastructure, which has been lagging in the continent."
Investing in Africa: the fundamentals look good
What Africa has got going for it, he explains, is a very young population. "People often mention Europe's ageing population as a negative, but they don't often mention that Africa, with a young population, has good opportunities.
"For a young country, a young population puts a strain on the infrastructure think of schools and healthcare but for any companies selling goods to the population, it's great, because the target market is growing very quickly."
Cellphone and household goods companies are two good examples, he says. In Egypt, Olympic Group is the biggest white and brown goods manufacturer, selling to a population of close to 70 million, where 800,000 new consumers enter the market each year as they reach adulthood. "They are a low-cost producer which is important when so much manufacturing is coming from the East."
The image of Africa as a failing continent exists for a very good reason. But there is a widening gap between reality and perception. "The improving situation is as real as it is under-reported," says Horne. "I think the global media is a little bit behind the curve. This is something that will gradually change. There will be a tipping point where people will realise that there are good things coming out of Africa and it is a good place to invest."
"If you ask people what Nigeria is known for, you'll have oil and fraud on that list. But the managers of these companies have been educated in the best universities of the world, worked in London or on Wall Street and then come home. They are as aware as the rest of us of the opportunities for fraud," says Horne.
"A bigger issue is an infrastructure that is less than enviable. Having better electricity, telecommunications, water supply, transportation, electricity generation and distribution these are the things that they worry about."
Banking reform, which has pushed up the minimum capital requirements for Nigerian banks to $200m, has caused consolidation in the sector. Numbers have dropped from 80 to 28, and the larger banks have benefited.
Investing in Africa: where should you invest?
Kenya has the strongest economy of the East African countries, and will
have an increasingly important role as it integrates its economy with the
less well developed economies of Tanzania and Uganda.
So where else in Africa should you be looking to invest? there's pretty Mauritius, with its strong tourist income; politically stable Botswana
And unlikely as it sounds, you might like to look at the Democratic Republic of Congo. The Congo has just limped out of a terrible war and is about togo to the polls. Katanga is one of the world's richest copper and cobalt producing areas. So far, any profits have flowed out of the country, pits often collapsed, and politicians have sold off mining rights to multinationals around the world. With the return of democracy that may change for the better. Or worse. (See also: Sounds mad, but is it time to invest in the Dem. Republic of Congo?)
It's possible to buy individual shares, but easier to invest via a fund, such as The Investec Pan-Africa Fund. Emerging markets funds, such as Morgan Stanley's Emerging Europe, Middle East and North Africa funds, will give you exposure to Africa, as will the First State Global Emerging Markets Leaders; Lazards Emerging Markets; Baillie Gifford Emerging Markets; First State Global Emerging Markets Leaders; Aberdeen Emerging Markets and JPM Emerging Markets.
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