High potential is still at the heart of Africa
WITH so much uncertainty about the world economy, it is a good time to diversify your portfolio by investing in Africa-facing funds. The recent launch of two such funds adds to a widening range of options: Sanlam Investment Management has started up an ex-South Africa fund, while Silver Street Capital has just set up an African agricultural fund.
It might seem counter-intuitive to hedge a defensive portfolio by investing in a traditionally high-risk region but the continent’s development potential and low correlation with global growth makes it a useful counterweight.
Despite the global downturn, the underlying fundamentals of most African economies were not affected – only a few countries went into recession while the others saw dips in growth (see table). And the inefficiencies of less developed markets also mean that there are many opportunities for high long-term returns.
Much of the continent’s rich commodities potential has until recently remained inaccessible due to both corrupt governments and lack of infrastructure. But with China pouring capital into resource extraction, others have started to take notice. Private-public partnerships are furthering development – just this week, London-listed company African Minerals Limited struck a $1.5bn deal with Chinese state-owned Shandong Iron and Steel to extend the construction of a railway line in Sierra Leone to more efficiently extract iron ore.
This investment has a knock-on effect, as Charlemagne Capital’s Sharat Dua highlights: “The commodity wealth for sub-Saharan Africa has started to be put to prudent, correct use for the benefit of the countries as a whole, building up fiscal surpluses and spending on infrastructure, which creates jobs in the formal economy.” The creation of these jobs widens the market for consumer goods, to the telecom industry’s advantage. One of Dua’s Magna Africa Fund investments, Safaricom, is also expanding into mobile banking services in Kenya, with its “M-PESA” service enabling mobile users to transfer money across the country without a bank account.
Investors are also looking into farming. Silver Street Capital’s Gary Vaughan-Smith expects a 15-20 per cent return on his agriculture fund due to population growth and urbanisation: “All those people (moving into cities) are no longer growing their own food and are also getting wealthier. As they get wealthier, they eat more protein and there’s a multiplier effect.”
So while investment in Africa still carries risks, from political unrest to high-risk industries, there are significant returns available on long-term investments. Best of all, if Greece defaults, your African investment will stay relatively insulated.
IMF PERCENTAGE GDP DATA/FORECASTS FOR A SELECTION OF
SUB-SAHARAN COUNTRIES
Country 2008 2009 2010 2011 2012 2013
Democratic Republic 6.06 2.83 5.43 6.99 6.77 8.05
of Congo
Ghana 7.27 3.51 4.50 20.14 6.81 5.25
Kenya 1.50 2.10 4.11 5.77 6.31 6.49
Malawi 9.38 7.99 5.96 6.29 6.62 6.84
Mozambique 6.73 6.33 6.45 7.54 7.64 7.87
Nigeria 5.98 5.63 6.98 7.31 6.73 6.56
Rwanda 11.19 4.14 5.39 5.88 6.36 6.92
Sierra Leone 5.53 4.01 4.76 5.49 5.99 6.21
South Africa 3.67 -1.78 2.59 3.64 3.97 4.43
Tanzania 7.43 5.45 6.17 6.73 7.47 7.46
Zambia 5.65 6.31 5.84 6.04 6.26 6.19