Business & Finance
Monday, August 09, 2010A Growing Consensus Regarding Invesment Opportunities in Africa
by Robert G. Roach, Nile CapitalShare this article:
- A China play: China’s investments in Africa are facilitating a reduction in political risk by forcing governments to improve property rights, the foundation for a sound investment environment. China’s investments have included significant infrastructure projects including transportation, power generation and natural resources. As an example, China has recently funded development of ten major hydropower projects in Africa with an aggregate capacity of 6,000 megawatts. Infrastructure is not mobile and many African governments are learning that political stability will allow them to attract and negotiate better terms with foreign investors. In addition, China has increased its trade with Africa from $10 billion in 2000 to $90 billion in 2009.
- Value: African markets are attractively valued from a P/E perspective relative to developed and developing economies. For example, the Sub-Saharan markets (as of June 2010) had an estimated price to earnings ratio of 12.8x compared to 18.6x in the US and 14.5x for the MSCI Emerging Markets Index.
- Growth: According to the IMF, 12 of the 28 fastest growing economies (in terms of average real GDP growth 2010-11) are in Africa including Ghana (12.32 percent), Congo/Brazzaville (9.36 percent), Angola (7.65 percent), Liberia (7.46 percent), Ethiopia (7.31 percent), Nigeria (7.15 percent), Mozambique (7.0 percent), Tanzania (6.45 percent), Democratic Republic of Congo (6.22 percent), Malawi (6.13 percent), Uganda (6.0 percent), and Zambia (5.94 percent). Sub-Saharan Africa is projected to generate 5.9 percent real GDP growth in 2011 and MENA (Middle East North Africa) has a 4.8 percent growth estimate. This compares favorably to the United States (2.6 percent), Europe (1.9 percent), Russia (3.3 percent) and South America/Mexico (4.0 percent). The only region showing more attractive growth is Asia driven by China (9.9 percent) and India (8.4 percent). Renaissance Capital developed an analysis based upon cumulative estimated GDP growth between 2010 and 2014. On that basis, nine of the fifteen fastest growing economies are in Africa (see Table 1 below).
- Uncorrelated Returns: African assets have historically generated a low correlation of returns with other global asset classes. A composite of African markets including South Africa, Nigeria, Kenya, Mauritius, Ghana, Egypt, Morocco and Botswana, had a correlation of .59 with the S&P 500 from January 2002 through June 2009. During that same time frame, the MSCI EAFE (Europe, Asia, Far East) and the MSCI Emerging Markets indices had correlations of .89 and .82 respectively with the S&P 500. For those who have happily forgotten their statistics, here is a link to a definition of correlation from Investopedia (correlation definition).
- Money Flows: There has been significant growth of investor interest in emerging markets within the past decade. This has created an opportunity for Africa, which has quietly experienced impressive economic momentum. That momentum should be sustainable as Africa’s GDP growth is projected to be around 6 percent annually over the next few years (approximating its historical GDP growth over the past decade). Analysts expect a continued surge in money flows to emerging markets. The surge in money flows will be driven by investors’ perception that returns in the US and developed markets will not be very rewarding. In addition, investors are concerned about the continued economic issues facing developed economies due to over leverage, rising budget deficits, high unemployment and loose-money central bank policies. Money flows to emerging markets is a sustainable trend and Africa should be a long-term beneficiary.
| Rank | Country | Cumulative Economic Growth 2010-2014, % |
| 1 | Liberia | 67.7% |
| 2 | Turkmenistan | 59.1% |
| 3 | China | 58.0% |
| 4 | Mongolia | 55.8% |
| 5 | Ghana | 52.4% |
| 6 | Qatar | 48.1% |
| 7 | Timor-Leste | 44.7% |
| 8 | Ethiopia | 43.7% |
| 9 | India | 43.4% |
| 10 | Botswana | 43.1% |
| 11 | Mauritania | 42.9% |
| 12 | Angola | 41.2% |
| 13 | Tanzania | 40.0% |
| 14 | Congo, Democratic Republic of | 39.7% |
| 15 | Uganda | 38.6% |
Source: Renaissance Capital
The investment opportunities in Africa were highlighted in a recent Barron’s cover story, “The Final Frontier.” The headline said it all: “Investors will lose a huge opportunity if they avoid vibrant and changing Africa. Fast growth in a continent of misconceptions.”
A main themeof the Barron’sarticle is that misperceptions derived from Africa of the past are adversely obscuring investors’ ability to see the opportunity that Africa represents today, possibly to their own detriment. Some very interesting analogies were made including:
- During the recent financial crisis, the United States and United Kingdom have effectively nationalized more companies (including firms like GM, Chrysler, AIG, Citigroup, Royal Bank of Scotland, and Northern Rock) than African nations have in the past nine years;
- In Africa, banks have not needed to be bailed out, no large companies have folded, and there have been no accounting scandals;
- With 5-8 percent annual growth in many African economies, “investors can find banks, brewers, supermarket outfits and mobile phone companies with good prospects, decent balance sheets and relatively low P/Es (especially compared to their growth potential).
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McKinsey & Company has released research touting the economic growth and business opportunities in Africa stating that "strong prospects await global companies that invest in the continent's consumer, agricultural, natural-resource, and infrastructure sectors." (Click here for McKinsey Research.)
- Boston Consulting Group has recently released a report titled "The African Challengers: Global Competitors Emerge from the Overlooked Continent." This report discusses "forty fast-growing and globalizing companies highlighting Africa's economic awakening ... ranging from $350 million to $80 billion in annual sales."
- David Rubenstein, co-Founder and managing director of the Carlyle Group was recently featured in a Wall Street Journal article discussion his "bullishness" on Africa (Click here for WSJ article.)
Larry Seruma and his investment team at Nile Capital Management recently published a White Paper (“A Time To Invest In Africa”) which discusses the prospects and underlying trends of the Africa investment thesis. In future blogs, I will delve into further detail of specifics underlying the Africa investment opportunity. Mr. Seruma has also been featured in two articles discussing Africa including The Wall Street Transcript (“TWST Investment Strategies Report”) and Black Enterprise (“The First African-Focused Mutual Fund”).
About the Author: Robert G. Roach is the COO/CFO of Nile Capital Management, LLC., an investment manager that manages funds focused on Africa including a Pan Africa mutual fund (www.nilefunds.com). Mr. Roach has more than 25 years of investment and investment banking experience. He received a BA in Economics from Dartmouth College and an MBA in Finance from the Booth School of Business at the University of Chicago. Mr. Roach may be contacted at robert.roach@nilecapital.com.Source: Renaissance Capital
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