“Nigeria has been extremely popular because it is the largest in terms of its economy and population – around 170 million people,” says Rory Ord, head of independent valuation at RisCura, an institutional investment adviser. “It has benefitted significantly from high oil prices and the commodity boom which has contributed to government finances. This has led to greater and much needed investments in infrastructure. However, the country needs an oil price of well over $100 a barrel to balance its budget.”
He adds: “Overall, though lower commodity prices are difficult for Africa because many countries that were booming have some kind of commodity underpin, either currently or planned for the future. For example, in East Africa, Kenya and Uganda discovered new oil and gas fields but they will need higher oil prices to make those investments economical to develop and bring into operation.”
Not surprisingly against this backdrop, investors are advised to adopt an extended timeline. Although the IMF recently cut 2014’s forecast for sub-Sahara to 5.1% from an earlier estimate of 5.4%, it sees next year’s GDP expanding by 5.8% thanks to foreign investments in natural resources, increased public spending on infrastructure and better agricultural production. This is higher than the US’ relative healthy 3.1% and way above the eurozone’s anaemic 1.3%.
As Roy Scheepe, senior client portfolio manager at ING Investment Management, puts it: “Sub-Sahara is being affected by short term issues but the focus should be on the longer term story based on strong demographics and sustainable growth. Look at the mature BRIC markets, their journey started 25 years ago and the development will be the same in these frontier markets.”
Stephen Bailey-Smith, Standard Bank Group’s head of African research, agrees, adding: “Growth in Africa will not be linear. There are great opportunities and I think we will see more people exploring them but it will not be a continuum. As with any investment, timing is everything and investors will have to do their due diligence.”
This applies to listed and non-listed as well as fixed income investments. Each comes with their own set of challenges. Take equities, there are 24 stock exchanges but only four – South Africa, Mauritius, Egypt and Morocco – are listed with the World Federation of Exchanges (WFE). The quality also varies significantly with South Africa being the firm leader followed by Egypt in terms of listings and volumes. Nigeria is also in the running while other smaller markets such as Botswana and Zambia do not have benchmarks.
“The main benefits of investing in the equity markets are diversification and low correlations to other emerging and developed markets,” says Dickson. “However, investors need to be aware of the liquidity issues although corporate governance standards have significantly improved. The markets have sold off this year which has generated good opportunities and while each country differs, some of the sectors we are looking at in general include small banks, consumer staples, infrastructure related companies and industrials.”
Comments