Update: read Profit from Africa’s economic renaissance for the latest on investing in Africa.
Thematic investing has been a buzzword over the past few years. Instead of talking about investing in France or Canada, in small firms or in large, savvy investors talk about benefiting from long-term shortages of natural resources, energy or clean water, climate change or the consumption patterns of the emerging middle class in Asia.
The last one has long been a favourite of mine. I’ve used it to explain why I think the big oil companies remain a good investment (middle classes love cars); why diamonds are an investor’s best friend (middle classes all over the world have been duped into believing they somehow represent love); why the mass market “luxury” brands such as Tiffany make a good addition to all portfolios (new middle classes love brands that scream status); and why agricultural commodities should be core rather than marginal investments (the richer we get the more we eat). But I’m beginning to wonder why it is we only think of the new middle-class theme in reference to Asia.
Why you should think about investing in Africa now
What of Africa? We hear about hyperinflation in Zimbabwe, drought in Kenya, war in Sudan and the plight of the continent’s thousands of child soldiers. We all know that the region has a substandard infrastructure and is handicapped by extreme and widespread poverty. When did you last read that economic growth across Africa is rising at an average of 5% a year and that this is forecast to continue for at least the next three years?
If you take China and India’s stellar growth rates out of the equation, Africa as a whole is growing at least as fast as Asia. The average mobile-phone owner in Nigeria spends $22 a month – nearly double that of the average Chinese user.
The point is that there are plenty of signs that Africa is not a basket case. It is a perfectly reasonable place to think about putting money. There is, I admit, not yet much demand for Tiffany keyrings in Kampala, but there is certainly a growing demand for air conditioners and more basic consumer goods, as well as globally branded foodstuffs (think Coke and Cadbury’s).
Commodities, Chinese cash and political change
The general view is that Africa’s growth comes courtesy of the commodities boom and as such is little more than a side-effect of the demands made by the emerging middle classes of China and India.
To a degree this is true. Africa is home to vast reserves of every commodity you can think of: it supplies half the world’s diamonds, a third of its gold, more than three-quarters of its platinum and palladium and holds about 12% of our known oil reserves.
So the supercycle in the commodities sector has been a great thing for Africa. It has meant that huge amounts of money have suddenly become available to improve infrastructure and to pay down debt. It has also meant that the continent has made a powerful new friend – China. In the past year the commodity-hungry President Hu and his colleagues have visited scores of nations signing hundred of deals with national governments along the way.
The result? Sino-African trade hit $55.5 billion last year, up 40% from the year before and the Chinese have now directly invested more than $6 billion into Africa. In the spirit of creating long-term bonds between nations, the Chinese have also provided millions of dollars worth of aid and low-cost loans. Africa needs roads, railways and money and the Chinese are giving all three.
But Africa isn’t just about the commodity story or China; it’s also about increasing political stability. Zimbabwe aside, very few nations are so badly run that their GDP is shrinking and, again Zimbabwe aside, it is increasingly possible to vote an African leader out of office rather than having to start a war to achieve regime change. It’s also about debt forgiveness, which is allowing many countries to make a fresh start.
Where to invest in Africa
So how can you get in? This is the tough bit. There are many good-quality listed companies across Africa. Analysts at Global Thematic Investors point out that African companies are often well-managed because of rather than in spite of their environment. Corruption, political uncertainty and dysfunctional credit systems mean cashflow has to be self-generated and tightly managed. There are also a lot of cheap companies – many blue chips yield 8%-plus.
The problem is that individual investors will find it almost impossible to buy into individual firms (it is hard enough to find a broker to buy shares in Asia, let alone Africa). And most funds that invest in Africa do so just in South Africa.
The only funds I know that look further afield are Investec Africa and Imara Africa Opportunities, in which you need to invest at least £53,000.
You could get exposure through one of the big mining companies (Anglo American (AAL) has a huge African business) or a natural-resources fund, but that doesn’t get us much closer to being invested in Africa’s more diversified growth.
One option is to seek out UK-listed stocks that have real African exposure. The best I can find at the moment is Lonrho (LONR), a small AIM-listed firm that represents the remnants of Tiny Rowland’s global empire. Its new chief executive, David Lenigas, has big ideas about returning the company to its former glory by investing across the continent to create a new pan-African conglomerate.
Can he do it? So far so good. He has taken stakes in a hotel, a uranium mine, a diamond mine, a water company, a port in Equatorial New Guinea and two air-lines and claims he is only getting started. It is a risky strategy, but if Lenigas keeps making deals, Lonrho could turn out to be a very good long-term investment.
First published in The Sunday Times 25/2/07