It appears as if even the most emerging of emerging markets have now come of age. Judging by the interest being shown in the remoter markets of Africa, there is no part of this higher beta quadrant where the intrepid investor will not venture forth.
But tracking down big game on an investment safari in the wilder parts of Africa requires a very different skill set than those needed for hunting in the concrete jungles of Stockholm or even Singapore.
Whilst the catch-all sector of services' increasingly dominates the landscape of the developed economy, frontier markets still have a much more natural' feel to them. This is because their industries are still concentrated on those sectors which harvest the fruits of our Earth - mining and agriculture - or are built upon admiring the magnificence of that same Earth - tourism.
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Without exception, these three flywheels - mining, agriculture and tourism or MAT for short - drive every African economy from Mali to Malawi and from Mauritius to Mauritania.
So does the portfolio investor seeking returns in no-longer-so-Darkest Africa start by investing in a listed copper mine, sugar state or beach hotel? Perhaps rather surprisingly, generally not. Whilst there are a handful of listed counters in these sectors, more often there is better game to bag elsewhere. My own approach to African investing can be summarised as follows: the best returns are found by tuning into the BBC'.
But here I am not talking about the highly respected Africa Service broadcast from London. Rather for me, BBC means Banks, Brewing and Cement'. And, in the wake of the privatisation wave that has recently washed over the Continent, one might add a T' for Telecommunications'.
So why are the BBC and T's often better investment prospects than the MAT's? To answer this question, one must appreciate the economic power relationships that dominate Africa's economies.
With mining, agriculture and tourism collectively generating over 80% of the foreign exchange earned by most African nations, these high profile sectors tend to be the preserve of multinationals or, in the case of oil and some minerals, the state. Generally speaking, their revenues and so profits are too strategic' to be shared with outside portfolio investors. There are exceptions: Mauritius Sun Resorts, Kenya's Sasini Tea or Anglogold Ashanti, but by and large these three sectors are considered "Royal Game".
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. The old adage "Show me a mine and I'll show you a healthy brewery" captures this linkage. Add to this the observation that, in the BBC & T quartet, you will find at worst' a stable oligopoly dominating each sector and at best' a discreet monopoly and one can appreciate that such counters use good pricing power to produce even better profits.
Indeed when the flywheels are turning fast - and the rise of Asian resource demand means that most African flywheels are now turning as never before the gearing effect of this prosperity is nearly always a healthy multiple of nominal GDP growth; my own estimate is at least 1.5 times. Superimpose the effects of oligopolistic behaviour on pricing power and profits can easily grow at twice nominal GDP.
There is a caveat - and it is a big one.The BBC & T sectors offer little or no protection against the predations of devaluation. Consequently where a nation is living well beyond its means and running a large current account deficit, even great profit growth may not be able to compensate for the haircut to capital values that a sharp fall in the currency would entail.
In short, my rule of thumb with investing in Africa is that, when 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.
By Michael Power, strategist at Investec Asset Management
