Published: July 18, 2008
By Julian Evans
Two years ago, you could count the number of international funds that invested in Africa, excluding South Africa, on one hand. Although several pan-African funds were raised in the mid-1990s, by managers including Morgan Stanley and Baring, most had lost money and struggled to find stocks in which to invest, and closed down after a few years. Only two pan-African funds survived and prospered - Blakeney Asset Management, managed by Miles Morland, and Emerging Market Management, managed by John Niepold.
In the last 18 months, however, over 15 new funds have been set up to invest in African stocks. Six new funds were launched or announced in May and June alone.
Mutual funds focusing just on Africa have been set up in the last 18 months by Stanlib, New Star Asset Management, Charlemagne Capital and Renaissance Capital, while Investec set up its pan-Africa fund in 2006. Africa hedge funds have been set up in the last two months by Insparo Asset Management and FCMB Partners together with INTL Consilium. MENA funds which invest in North Africa have been set up, this year, by ING, Societe Generale, Pictet, Investec, Franklin Templeton, and T Rowe Price. Frontier funds which invest in African stocks have been set up this year by GAM, Progressive, Claymore, Invesco, State Street, and Barclays, and Schroders and AMC say they plan to raise frontier funds this year.
Equity investment is flowing into Africa from the Middle East as well, both in the form of direct investment via sovereign wealth funds and companies like Dubai World, which plans to invest US$4bn in African infrastructure in the next few years, and through funds. Both Stanlib and Investec have raised Sharia-compliant Africa funds this year, to give Middle Eastern investors access to African equity.
Over US$2 billion has been raised for investment into African stocks in the last 12 months - more than was ever raised in the last decade by all funds, including South African funds, according to the Center for Global Development. Clearly, it's quite easy to persuade institutional and retail investors to put money into Africa. Stephane Bwakira, who manages Stanlib's US$330m Africa equity fund, which launched in August 2007, says: "Three or four years ago, you encountered quite a lot of scepticism about African equity. It was a hard sell to raise money. Now, it's a lot easier."
Strong commodities story
The story for African equity is clear. Most obviously, it's a commodities story. Africa contains 90% of the world's diamonds, 90% of its phosphate, 50% of its gold, 40% of its platinum, 12% of its natural gas and 8% of its oil. That's helped GDP to rise in the continent faster than the OECD average since 2000, from a low base. In Angola, the global rise in oil prices helped GDP to grow by 24% last year, making it the fastest-growing economy in the world last year. Companies and governments from all over the world are once again scrambling for Africa in their competition for natural resources. As a result, private FDI outnumbered state aid for the first time last year.
But Francis Beddington, head of research and co-manager of Insparo Asset Management's Africa hedge fund, says: "It's not just about commodities. In general, the macro picture is very good in many African countries, with declining levels of debt [partly due to debt forgiveness by western countries], low interest rates, and fast corporate earnings growth." Perhaps the most exciting aspect of the market is the retail sector. Mobile phones, for example, are catching on in a big way, though penetration is still only around 20%, though this is forecast to rise to around 40% by 2011. Retail banking is also in its infancy in sub-Saharan Africa, with credit card and mortgage markets just beginning in countries like Nigeria and Kenya. Retail companies from South Africa, such as mobile phone company MTN, beer company SAB Miller, and supermarket chain Shoprite, are rapidly expanding around the continent to take advantage of the growing retail boom.
There is also, perhaps, greater political stability than there has been in past years. John Niepold, the veteran Africa manager at Emerging Market Management (EMM), says: "There's always some countries in the continent with political issues. But in Africa today, it's in the single digits. There are no civil wars going on now, for example. Things are quite calm, relatively speaking. Why is that? It's because generally speaking, governments are getting out of the way and letting the private sector get on with business."
These factors have translated into strong performing equity markets and strong-returning funds. Africa equity markets from 2002 to 2007 delivered a US$ return of over 140%, making it one of the best performing regions in the world. Last year was a particularly good year for markets like Kenya and Nigeria, so the few funds then in existence had a great year. EMM's Africa fund, for example, returned 77% last year. Niepold says: "Our returns have been dramatically better than average emerging market returns. The reason is largely because price valuations in Africa were much, much lower than emerging markets, while earnings growth has on average been better." Volatility levels are, on average, the same as other emerging markets (perhaps because it's difficult to sell some stocks even if you want to), while the correlation in sub-Saharan stocks is low with both developed markets and emerging markets. So African stocks could be a safe haven from the global economic gloom.
As a result, Africa is now coming onto the radar of many asset managers. Their job is being made easier by several new Africa-inclusive indices that have recently been set up. Standard & Poor's launched an 'Africa 40' index in April, which includes 40 of the most liquid African stocks, as well as an Africa frontier index for small African markets. Scipion Capital, managed by Nicolas Clavell, tracks the African Investor index, while Claymore's frontier fund tracks the newly-created Bank of New York Mellon frontier index, of which 20% is invested into Egypt and Nigeria. Merrill Lynch and MSCI Barra have also both recently launched frontier indices.
In addition, institutions like Bank of New York Mellon and JP Morgan have been helping African companies do GDR listings, which is opening their companies up to a broader investor base. Several Nigerian banks, for example, set up GDR programmes last year. Diamond Bank of Nigeria raised US$500m with an LSE listing in January this year, while Guaranty Trust Bank and Access Bank both did GDR offerings last year. Several Egyptian companies have also arranged GDR listings in the last two years, and Orascom Hotels and Development announced earlier this year that it plans to list its shares in Switzerland as it expands into an international real estate business.
Have new funds missed the party?
However, with so many new funds having been raised in the last 12 months, are there enough stocks in which to put the money?
The Africa stock universe is still quite small - Stanlib estimates there are just 200-250 stocks which are investable for the entire continent. The most liquid stocks, other than South African companies, are Nigerian banks, Egyptian companies (particularly telecom companies) and some Moroccan stocks. Valuations on these stocks have risen up to levels of 30+ times earnings. That's put some investors off. Oliver Bell, who manages Pictet's new MENA fund, says: "We think Nigerian stocks have become way too expensive. We see more value in Gulf stocks." Chris Alderson, manager of T. Rowe Price's MENA fund, agrees, and has invested 95% of his fund in the Gulf.
Nick Eastwell, managing director of EEMENA at Linklaters, says: “is there a critical mass for African equity markets? No, not yet. There’s too much money chashing too few stocks. So many stocks are over-valued.”
Stephane Bwakira of Stanlib says: "African equities in general have become quite expensive. Nigeria is a good example. It's not just because of new foreign funds. There is also huge appetite among domestic retail investors for Nigerian stocks." Indeed, in Nigeria, Kenya, Zambia and other countries, we are seeing what could be described as stock fever among the growing middle classes. IPOs like Safaricom's in Kenya and CellTell's in Zambia have been massively over-subscribed by retail investors, while in Nigeria, barely a month goes past without a company raising millions of dollars through a pre-IPO private placement, which is a form of equity raising that is at the moment unregulated by the government.
Indeed, if any market deserves the term 'Wild South' at the moment, it's Nigeria. The local banks have raised over US$2bn through IPOs in the last year, and are channelling that money back into the Nigerian Stock Exchange by margin lending to stock brokers. In May and June, however, banks started to get nervous about margin lending, and started to do it less. This caused the market to go into a tail-spin, with the NSE falling 40% in six weeks. Sebastian Spioh-Garbrah, Africa analyst at Eurasia Group, says: "The correction was partly because of the banks reduced their margin lending to brokers. But there is also a fundamental issue. The P/E ratios for Nigerian banks were way in excess of anything that was reasonable."
John Green, pan-Africa managing director of Investec Asset Management, which has over US$1bn invested into pan-African equities, says: "We've been big beneficiaries in the growth of Nigerian financial stocks. We rode the wave of the first tier, and when they got to P/E's of 20, we moved down into second-tier financial stocks. They got too expensive as well." Green sounds a note of caution: "You need to be careful before you commit money into that sector. It reminds me of what happened in Middle Eastern equities three or four years ago. There's a bit of stock fever. I hear 400 new stock market accounts are being opened a day."
However, if you steer clear of the most liquid - and most expensive - stocks, where else can you go? Other markets in Africa are still tiny, and difficult to enter. Uganda's stock market is only open three days a week, for example. Matthew Pearson, head of Africa research at Renaissance Capital, says: "A lot of funds are heavily weighted to Nigeria, because it's easy to allocate there. Elsewhere it gets harder. Malawi, for example, had the best performing stock market in the world for the last three years. But you could move the market just using your credit card." Smaller markets are doing well this year compared to Nigeria, with the Ghana Stock Exchange up 47% year-to-date, making it the best performing exchange in the world this year.
This means that the investors that do best are likely to be the ones that work the hardest to find the smaller stocks in out-of-the-way exchanges. Niepold says: "Some of the new wave in African fund management will have a bit of catching up to do on the old hands, like us. You'll see them investing a lot in Egypt, Nigeria and Morocco. It's going down to the next tier, that's the learning curve. Sometimes the best value stocks are the hardest to buy. It's still not that easy a market to invest in. It's not a region where you can sit behind your desk trading on Bloomberg. And it requires responsibility too. It's not a market where hedge funds can leverage up and go crazy. It's still a fragile market."