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Positive investment outlook for Africa and SA

30 November 2010 BoE Private Clients

Developed economies’ slow growth and lower returns on equities compared to those of emerging markets in Africa is huge in driving foreign investment to the continent. And South Africa as its ‘gateway’ is already starting to benefit.

Daryll Owen, Chief Investment Officer at BoE Private Clients, says Wal-Mart, which is using SA as a springboard into Africa, is an excellent example of this.

“Wal-Mart’s current turnover of $400 billion per annum exceeds South African total annual GDP by $100 billion and constitutes nearly half the $700billion total market capitalisation of the JSE. There’s good reason to sit up and take notice when a company of this magnitude starts to investigate seriously the options in South Africa and in the continent as a whole.”

“There is no doubt that the investment road ahead is likely to be bumpy, but the outlook for Africa as an emerging market is positive. The search for yield has already resulted in substantial foreign investment in South African markets and emerging markets generally. We have seen net inflows into emerging markets since April last year of something in the order of R6 trillion.

“If one looks at the MSCI emerging market index relative to the MSCI world index it is immediately apparent that the recovery in the emerging markets since the lowest point of the global recession has been considerably stronger than the recovery in developed markets. Indeed most emerging markets, including South Africa, are back, or nearly back, to the position they were in prior to the recession,” he says.

Turning to average annual rates of return, Owen notes that in local markets equities have consistently outperformed other asset classes, including bonds and fixed deposits, as well as inflation, whether measured over the past 5, 10, 20 or 50 year period. The same cannot be said of most developed economies where, over a 10 year period, bonds have generally outperformed equities, in some cases by a significant margin.

Taking all factors into account, Owen believes that Africa offers global investors attractive opportunities, and that a revaluation of African markets together with an increase in corporate activity, is likely to be the result.

“While forecasting is always fraught with assumptions, all of which have to be carefully considered, we’re looking at GDP growth of 3% in South Africa in 2011 and around 4% between 2012 and 2015. Elsewhere in Africa, the forecasts for GDP growth between 2012 and 2015 are higher – for example, 6,2% in Nigeria and Kenya, 7,2% in Tanzania, 7,3% in Uganda and 7,6% in Ethiopia,” he says.

Whether or not the global economy is facing a double dip recession (not our base case) , or whether the global economic recovery is likely to be more or less gradual (‘U shaped’ or ‘V shaped’) there can be little doubt that the share of world output or total GDP enjoyed by emerging economies, including Africa, will increase over the next few years, says Owen.

“Comparing forecasts for GDP growth in the emerging economy of Africa with those for developed economies, it is readily apparent that the so-called ‘dark continent’ will outshine many of the more industrial nations over the next few years,” he concludes.

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