Category Investments

Investing in Africa: quality management teams key

21 May 2015 Mishnah Seth, Momentum Asset Management

Africa is now being termed the final frontier and a number of South African and international corporates are expanding into the continent. With the region’s population growing rapidly and the United Nations (UN) forecasting that 22% of the world’s inhabitants will be living in the region by 2050, Africa’s geographical and market-growth potential has become evident.

A young and growing population translates into consumption growth being a key investment theme across the continent. This has been supported by a growing middle class, with rising income levels resulting from resilient GDP growth in the area. “The continent is expected to house the world’s largest workforce by 2035,” says Mishnah Seth, head of Frontier Strategies at Momentum Asset Management. “The resulting increase in consumption expenditure, underpinned by a growing middle-income demographic, has paved the way for asset managers who are able to leverage the unique investment environment in Africa.”

A wealthier consumer is central to the African investment theme, with consumer staples, brewery, cement and mobile and financial services industries benefiting from an increase in retail and personal spending (financial services and mobile data will likely offer a sustained growth outlook as improving internet penetration supports industries such as banking and retail). An understanding of consumer dynamics on the continent is, however, necessary and asset managers need to partner with companies that demonstrate this insight, have strong leadership teams and are good allocators of capital. Strong distribution networks are also necessary in order to tap into informal markets.

“The operating environment in Africa is volatile and it is important to associate with strong management teams,” says Seth. “Investment managers need to assess whether or not a company ‘delivers’ as brand loyalty is clearly visible in some countries. With disposable income still limited in many cases, consumers want to spend their money prudently.”

Impediments to growth in Africa are largely related to infrastructure constraints in the power, transportation and housing sectors. Related growth is required to drive development (lower costs) in other areas of the economy across the continent and cement consumption has been well supported in pursuit of this objective. Growth in the construction sector is set to remain robust as a result.

Infrastructure development and spend, whether it be rail or road, housing or electricity, is therefore another important (and vital) investment focus. Both governments and private sector participants in the region are looking to address these deficits in a number of markets, offering further significant potential for growth, job creation, social upliftment and equity generation.

Although overall liquidity remains a challenge on the continent, it is believed that the region will continue to evolve and grow and, in the long term, reach levels enjoyed by other large frontier markets. “Operating environments are undoubtedly a challenge and selecting companies with quality management teams is key to investment success.”

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