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Uncovering alphas hiding place

23 November 2016 Jonathan Faurie

In an economic landscape where alpha has become a scarce commodity, fund managers are frantically looking for areas where this scarcity can be found in abundance, a place where their value can unreservedly be displayed to clients; a fund manager’s Shangri-La.

For many years, this mythical land of abundance was found in commodity driven economies. Chinas infrastructure build programme, which for many years was thought to be an insatiable beast, was a safe haven for fund managers as were the economies that supplied these commodities to China.

The world as we know it

Since the Asian giant applied the brakes to its ambitious growth, the world has had to become used to a new normal, a world where the global economy, and Africa in particular, has been plagued by some major infrastructural imbalances which have potentially disruptive political undercurrents.

Speaking at the recently held SRP Africa Structured Products and Alternatives Investments Conference, Dr Iraj Abedian – Chairman and Chief Executive of Pan African Investment & Research Services – warns that such challenges could prove to be worrisome.

“Structural blockages in Africa, especially infrastructural blockages and poor human capital, continue to erode the continent’s economic growth potential. Added to this is the face that the continent also labours under both structural and policy constraints,” said Dr Abedian.

The challenging side of the coin

When looking at the African continent, conditions for commodity exporters have deteriorated with the onset of the commodity price slump following the Chinese scenario discussed earlier in the article as well as the volatility of oil supply and demand which has affected prices negatively.

“Many African countries thrived in conditions conducive for growth. These countries have now been thrown back into regional instability as they look for other ways to add value to their economic growth. This has predictably frightened off investors,” said Dr Abedian.

He added that political leadership on the continent has also let the public down. The time of African Renaissance may be at an end while political leaders shelve necessary infrastructure improvement programmes that could add serious value when it comes to employment.

This has resulted in growing tensions and frustrations which has seen the youth, as well as fundamentalist groups such as Boko Haram and Al Shabaab fighting against the government and the laws they impose.

The cloud with a silver lining

“There are many educated people who are debating these challenges at the highest level,” pointed out Dr Abedian, “new growth areas need to be found, and agriculture looks to be one of the front runners. This will mean positive change will be brought to Africa as it is the continent with the greatest arable land mass and the youngest mass workforce in the world.”

As with China’s infrastructure growth, the future interest in agriculture won’t be limited to the production of food. It will be extended beyond that to sustainable farming methods, food processing and beneficiation, logistics and trade agreements negotiated with countries.  

Applied learning

The concept of shared value has been widely spoken about in many circles regarding lessons previously learned.

For the past fifty years, the world has relied heavily on the production of oil and the value it added to economies. However, this has very seldom translated into large scale economic growth. While countries like Angola and Mozambique benefitted from wold wide oil demands, their countries remained some of the poorest in the world.

We cannot make the same mistake when it comes to agriculture growth. If we want to live up to ideals that every member of the public must benefit from economic growth in a country, shared value needs to be embraced.

“Investment that modernises and maintains sustainable growth can propel economic prosperity. However, matching these investment principles with physical projects requires solid cross border collaboration with government and the public working together in public private partnerships,” concluded Dr Abedian.

Besides the trap of shared value, investors cannot fall into the trap of lumping Africa as one homogenous region. Various laws govern the continent and there is such a diversity of cultures and languages that investors need to look at each country and the challenges that they present.

Editor’s Thoughts:
The future for Africa is great. Of the ten fastest growing economies in the world, Africa is home to five of them. Taking advantage of this growth will depend on having feet on the ground and the application of a measured and patient approach to investing. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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