1 November 2017

Africa rising – investing in the continent

My Money Matters |

Africa Rising. It’s an expression we’ve been hearing for years, associated with economic growth, artistic expression, and a continent on the brink of greatness. It conjures up positive images of a continent that is finally coming into its own and getting the global recognition it deserves. But despite Africa’s growing potential, it is still viewed by governments and institutions as a risky bet. It’s volatile, unpredictable and perhaps a little too “colourful” for some investors.

We talk with Godfrey Mwanza, head of Pan-Africa Listed Equities at Absa Wealth and Investment Management, to de-mystify investment in the continent.

“The potential in Africa is manifold,” Mawanza explains. “Africa is urbanising faster than any other region on the planet. African cities will gain 24 million people each year until 2045. This is much faster than even China and India which will be adding 9 and 11 million, respectively. That means more mouths to feed which is good for food producers, it means more homes to build which is good for construction, more cell phones, bank accounts and so forth. It is a massive opportunity.”

Mwanza isn’t the only one who thinks so.

This year, the African Development Bank declared Africa to be the world’s second-fastest growing economy, with average growth being estimated at 3.4% in 2017, and 4.3% in 2018. As a region, Sub-Saharan African countries are bettering even that impressive average, with over one-third of them posting 6% or higher growth rates, and another 40% growing between 4% and 6% per year. It’s no wonder that several international business observers have named Africa as the future economic growth engine of the world.

In fact, GDP growth rates in developing countries are on average higher than those in developed countries, making them very attractive for investors who are willing to look past the risks and see the potential.

Africa in the new millennium.

Of course, despite what some less-informed foreigners may think, Africa is more than one country, and some countries are rising to their potential better than others.

“Resource dependent countries like Nigeria have, perhaps, not lived up to their potential, while non-resource countries like Kenya are doing much better,” explains Mwanza.

“The period between 2000 and 2008 was a turning point in many African countries outside South Africa. Firstly, you had the IMF – World Bank debt relief initiative or HIPC (Heavily Indebted Poor Countries programme) which re-set the debt levels of governments who were allocating capital to interest payments instead of development projects. Secondly, you had very strong commodity/resource price inflation on the back of Chinese industrialisation. From copper to crude oil to iron ore, resources entered, what pundits called, a super cycle and African exporters in these commodities benefited tremendously.”

Because of this ‘perfect storm’ of events, when the global crisis hit in 2008, many African countries were in a very good position to support the economy during the great recession. This created a sense of belief in the investment community that Africa was singing to its own tune, and that it no longer correlated with the global economy.

But has Africa lived up to its potential since then? “The honest answer is yes and no,” says Mwanza. “Some countries are doing better than others. After 2008, we saw resource-dependent countries grow relatively well. Unfortunately, the economic stimulus focused on consumption rather than investing in productivity-enhancing physical and human capital. When the oil price crashed in 2014, those resource-dependent countries suffered the same old ailment of undiversified countries worldwide. They are a slave to the cycle of the price of their export. Meanwhile, non-resource dependent countries in Africa have done more investing and are seeing much stronger and more diversified growth.

Depending on where you focus your attention, it is clear that there is heaps of potential in Africa. “The biggest pro in investing in emerging markets is growth,” explains Mwanza. “Emerging and frontier markets have been growing faster than the developed world for many years. This is not going to change.”

On the flip side, the biggest con is volatility. “Modern finance defines risk as volatility, the tendency for values of assets to rise and fall. Seeing your portfolio down double digits in a quarter can be a source of great stress for certain investors. The way to resolve that is education and patience.”

Absa in Africa

For wannabe investors with a belief in the African potential, Absa has a wealth of experience and a variety of products and services to help.

“At Absa, we utilise an unconstrained approach to stock selection that allows investors to invest wherever they see the most value in African equity markets, regardless of the strategy’s benchmark construction. We focus our research capabilities on bottom-up analysis of quality businesses – that is those with the ability to consistently earn high returns on invested capital in cash and possess sustainable competitive advantages as well as those that have the ability to fund high margin growth and absorb business cycle shocks or competitive pressure.”

Absa has a concentrated portfolio of 30 stocks across 13 African markets and ten different industries, as well as a unit trust fund here in South Africa and a Dollar denominated unit trust listed in Dublin, Ireland.

But whichever option you choose, Mwanza advises potential investors to be long-term focused and not fall into the trap of negative news that can drive sentiment in the short-term. “This kind of confidence only happens if you are comfortable you are invested in the right companies. We believe that means you should be invested in the highest quality companies so that you can rest easy even when there is negative news about the politics of a particular country, as an example.”

Most importantly, Mwanza advises learning as much as you can from an expert. By doing your research and starting small so that you can build up experience and confidence, you could, like so many others, prosper from investing in the African dream.

For more information, please phone the call centre on 0860 11 456, email to utenquiries@absa.co.za or ask your financial adviser.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.

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