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Africa – at the crest of the emerging market investment wave

07 May 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

South Africa is the undisputed economic heavyweight in Africa. Our 2009 GDP topped $287.9bn for a per capita GDP of $5 838. The big question is whether we will still occupy the throne a couple of decades from now? Before you answer in the affirmative you

Egypt and Nigeria are hot on our heels in the race for African economic domination. The former delivered $183.7bn in 2009 GDP, while Nigeria achieved $167.3bn. And the growth rates in these economies are considerably better than ours. Egypt averaged 4.9% per annum in GDP growth between 2001 and 2009 – and Nigeria 6.2% – while we bumbled along at 3.6%. After running a few basic calculations through our trusty spreadsheet we predict Nigeria will replace us at the top of the African league table by 2031. And if Angola can maintain its 12% per annum GDP growth it will trump us as early as 2027.

Six reasons to back African equities

Godwin Sepeng, Boutique Head, OMIGSA Long Term Equity argued the case for African equities at a recent Old Mutual Investments Group SA press conference. His presentation was titled: Why invest in African equities? The first of six trends favouring long-term inward investment in Africa is the region’s ‘higher than average’ economic growth. African equities get the long-term investment nod because Africa, alongside other emerging markets, should consistently outperform the developed world over the next decade. And Sepeng believes there are a handful of African companies that could outperform the continental growth average to boot.

The second plus for Africa is its massive share of global resource reserves. According to Frontier, Advisory Research 2008, 90% of the world’s platinum group metal reserves, 60% of diamonds, 40% of gold and 30% of cobalt lie buried under African soil. The continent also boasts 10% and 8% respectively of world oil and gas reserves. The developed world needs commodities to fuel growth – and they will have to ‘mine’ them here. Improvement in policies ranks third on the pro-Africa list. Sepeng says the ease of doing business with countries in Africa has improved markedly in recent years. The list of African countries regarded by the IMF as ‘stable’ has improved significantly since 1991. Measures of stability include GDP growth in excess of 2.5%, CPI inflation at 6% or less, and external debt lower than 60% of GDP among others.

International corporations and investors are cottoning on to Africa’s potential. Foreign direct investment is improving, albeit off a low base. Egypt, Nigeria and South Africa have attracted the bulk of these inflows, for different reasons. Egypt gets the nod because of its close proximity to the European Union, Nigeria for its oil and gas reserves, and South Africa due to its diverse economic base and good infrastructure. South Africa is also seen as a platform for onward investment in sub-Saharan Africa. Giant companies such as SAB Miller, AngloGold, Woolworths, Shoprite Checkers and MTN have already made massive inroads in the region. The willingness of companies to pour money into the ‘dark’ continent is the fourth reason to back African equities.

Releasing the debt burden

Countries throughout the region have implemented better fiscal and monetary policies and economic management. South Africa has revelled under consistency of leadership too, with Trevor Manuel presenting 13 consecutive national budgets as Minister of Finance. Such discipline has greatly reduced debt burdens in the region – a fifth motivation for the African equity dream.

“Africa’s population is its largest asset,” observes Sepeng. Africa’s working age population as a percentage of the total population should remain in a growth phase until 2050. In stark contrast, populations in the United States and most of Europe are ageing fast. African GDP growth per capita has improved every year since 2009 and will continue to do so thanks to these demographics. Nigeria (144m), South Africa (49.3m) and Sudan (42.3m) have the human resources required for continued growth – the sixth plus-point for African equity.

Where to invest in Africa?

The JSE is still the largest exchange in Africa, whether by market capitalisation or number of listed companies. Investors wanting to invest directly in other African exchanges should consider the more liquid shares on stock exchanges in Egypt, Nigeria, Morocco and Kenya. Sepeng didn’t mention his favourites; but included a useful lift of liquid shares in each of these markets. The list is dominated by companies in the telecoms, construction, banking and brewing sectors. Egypt’s most tradable shares include Orascom Telecoms, Orascom Construction and Telecom Egypt – in Nigeria companies like First Bank of Nigeria, Nigerian Breweries and Afribank attract strong interest – while Kenya’s most liquid shares include Kenya Airways, East Africa Breweries and Bamburi Cement.

Editor’s thoughts: If you invest in locally listed equities then you already enjoy significant exposure to the African success story. Top40 heavyweights like Shoprite Checkers, MTN and SAB Miller have wasted little time in gaining a foothold on the continent. Do you think African GDP growth is sustainable at current levels? Add your comments below, or send them to gareth@fanews.co.za

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