The last of the great frontiers – Riding the growth wave in Africa

With developed markets around the world heavily indebted and offering limited growth, the scramble for investment opportunities is once again shifting to Africa. The African market continues to offer return delivery and this was no more evident in the uni

While this is an excellent achievement and the fund did well outperforming its benchmark, chief investment officer Eldria Fraser attributes this largely to the current strength of the African market. But will the continent continue to be a good investment destination over the longer term and is this growth sustainable?

“Change in markets generally follows a pattern that starts with society focusing on agricultural development,” explains Fraser. “It then moves to a more industrialised environment and then it “financialises”. Along the way you generally see a lift in GDP and GDP per capita (as the middle class grows) and listed assets can also be a strong beneficiary of this growth.”

Fraser believes that there remains much investment value to still come out of Africa. “African growth has outpaced that of the rest of the world for some time and, as a sought after “commodity”, this is set to continue for some time to come, with growth expectations ranging between five and nine percent for the next three to five years,” she says. In addition, not all African markets are as plagued by debt as the developed markets.”

According to Fraser, the growth of the African middle class, due to an increase in GDP per capita, is changing spending patterns in the region. “Demand for resources and growth of the African economy has led to a more brand specific focus from consumer and also an increase in demand for services,” she says.

Currently, the Prescient Africa Equity Fund has invested less in consumer-specific sectors, and instead focused on exposure to services such as telecoms and financial sectors, which also access the consumer market. According to Johan Steyn, the Fund’s assistant portfolio manager, the larger consumer shares are expensive and the Fund will pick these up when valuations are more attractive.

“The financial and telecom sectors are still the largest in Africa, while the value added industrial sector isn’t that sizeable in comparison,” he says. “Yet, the Fund still participates in the change in consumer demand through the financial and telecoms sectors, which access consumers in innovative ways. For example, we invest in Safricom, the largest supplier of mobile telephony in Kenya which offers a mobile payment system to consumers where they can transact money transfers electronically. This has been expanded to include micro loans and investments, a very innovative move”

The Fund hopes to capture some of this developing market’s growth and provides a vehicle for investors to gain exposure to the continent. “We invest largely in shares listed in Kenya, Nigeria, Egypt, Mauritius, Tunisia and Morocco, using our Equity Active Quant approach which buys shares based on good valuation, as well as momentum or positive sentiment,” says Steyn.

Fraser points out that most of the value selection in the region is dominated by Banks and Telecoms. “The telecoms are spread across markets and include Safaricom, Maroc Telecom and Telecom Egypt. Safaricom is currently trading on a dividend yield of four percent, and has maintained market shares of around 80 percent by usage, despite the market being plagued by price wars over the past two years. It is therefore in a strong position as some competitors are not profitable and unlikely to survive.” she says, about where they find value. “Our equity selection process favours the value, but also the positive sentiment on the back of the growth prospects resulting in an overweight relative to index in bank and telecom shares.”

Steyn says that Financials make up 50 percent of the MSCI African (ex SA) index, with almost half of the shares listed in Nigeria. “Therefore the bulk of our Bank overweights are domiciled in Nigeria,” he explains. “The largest Nigerian overweight shares are Access Bank, Zenith Bank and First Bank of Nigeria. Banks in general, benefitting from recapitalisation and growth, are aiming for increased capture of the growing middle class. African Alliance Securities reports that Nigeria’s banked population is only 31 million out of an adult population of 85 million.

“Markets including Kenya, Nigeria, Egypt, Mauritius, Tunisia and Morocco are showing increasing potential as investment destinations such as the African continent offer much potential for future growth, some diversification away from current investment holdings and opens its doors to foreign investment,” he concludes.

The Fund is easily accessible to investors as it is a Rand priced South African Unit Trust and there is therefore no exchange control approval process, a common hindrance to investors wanting exposure to Africa.