The investment prospects for Africa as a whole are exciting and offer the potential to provide great
long-term returns, according to Josef Odili, head of Africa Manager Research at
RisCura.
“The key is to have a thorough
understanding of each country’s unique situation. A frontier market like Africa
(excluding South Africa)
has a very different dynamic to developed markets and it’s important not to
invest without understanding this dynamic.”
For example, Nigeria has enjoyed
strong returns over recent years, but there is some uncertainty in the short
term given the election next year and the appointment of a new central bank governor
this year. On the positive side, assertive actions are being taken to address
the country’s shortfall of electricity. Reducing electricity
prices from their current levels will be a significant boost to the
economy.
In terms of sectors, African
consumer stocks have been a popular investment for some time. However, as some
of the big consumer names are a large
part of the Africa indices, they’re owned by a lot of managers, and their
valuations are getting stretched by the increasing demand from foreign
investors. Although quality companies, there are risks to be aware of. For
example, the Boko Haram terrorist activities have presented distribution
problems in northern Nigeria and it is therefore a challenging environment for
businesses.
“While Nigerian companies face headwinds in the short term,
the situation has had little impact on prices, and quality stocks continue
to be supported by strong demand from foreign investors seeking
exposure to Africa,” says Odili.
Apart from consumer stocks, the African growth story,
particularly sub-Saharan Africa, will continue to reward investors, with GDP
expected to expand by 5% in 2013 and 6% in 2014, according to the International Monetary
Fund.
Many investors are sold on the
growth and diversification arguments for investing in sub-Saharan
Africa. They’re just not sure how best to go about it. As a result, many focus
on South Africa, with its comparatively large stock exchange and high
standards of corporate governance. However, the prospects for South Africa are
somewhat muted in comparison to other sub-Saharan countries, with the growth
rate hovering in the 2% range.
Investors are well aware of some
of the challenges that investing in Africa excluding South Africa poses, such
as the issue of liquidity. Liquidity fears can cause managers to hold onto shares such
as Nestlé Nigeria, currently trading at a price to earnings ratio of
30 plus. They know it’s overvalued, but they’re afraid to offload their
holdings as there is no guarantee they can buy back their shares when the
company’s valuation returns to or slips beneath a realistic relationship with
its intrinsic value.
Liquidity isn’t the only risk in stock
markets north of South Africa. There is a scarcity of reliable data and
information. This is a key difference between frontier and emerging markets,
although the situation is improving. There is also a paucity of skilled
investment professionals, and tried and tested investment processes. Nor are
there long-term track records to take comfort in.
Despite the above, Odili is very
optimistic about Africa as an investment destination. It is these
inefficiencies that create the potential for outsized returns. The key to
manager selection in Africa, is on-the-ground research.
“The speed of change in Africa is simply too fast to rely on last
month’s research reports written by analysts in London or New York.”
Furthermore, it’s imperative to
understand the quirks and nuances of individual countries, cultures and markets
if you want to avoid the many pitfalls of this fascinating continent of growth.
RisCura is a financial analytics
provider and investment consultant, specialising in investments in emerging
markets, specifically Africa. The company services institutional investors with
over US$200bn in assets under management, as well as a significant number of
asset management, hedge fund and private equity firms.
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