Issue: July/August 2005


Michael Streatfield, strategist at Investec Asset Management In the second part of this series, Investec Asset Management strategist Michael Streatfield explores some hot investing themes in the continent's reinvigoration.

From the jubilant Live8 concerts to the sober Gleneagles G8 summit, Africa is very much in the news. And it’s good news. While aid packages relieve social burdens, Africa is being better positioned to help itself.

Against the backdrop of positive global shifts towards Africa by the Western world at large, Investec Asset Management’s Africa research team has been on the ground to examine real investment opportunities in Africa today.


In compiling an African portfolio from a bottom-up perspective, several sectors and sub-sector themes have emerged. The following four we find most compelling:


    Owing largely to the lack of fixed-line infrastructure, the mobile telecoms sector in Africa has really taken off. Rates of subscriber growth continue to beat expectations. What makes this sector so compelling is not only the relatively low market penetration, but also that the number of licences is limited. Whereas in the UK, for example, there are about six mobile operators all fighting for share of a market that already has over 80% penetration, a country such as Egypt has only two operators in a market where penetration is just 10%.

    The operating environment is characterised by high subscriber growth rates, low churn rates and low acquisition costs (operators don't have to hand out free handsets or minutes to lure customers). Most operators produce healthy cashflows, resulting in either attractive payout ratios or acquisitive growth in other low-penetration markets.

    Favourite stock: Orascom Telecom,listed in Cairo and Alexandria. Last year it grew earnings 250%! We’re looking for earnings growth of around 65% in 2005 and 55% in 2006.


    Beyond South Africa, the banking sector is poorly developed. In particular, retail banking services lag. Debit cards, credit cards and mortgages are still viewed as new products and, in some markets, are yet to be introduced.

    Most banks in Africa were traditionally lenders to government. They had limited corporate and retail interests. With deficits reducing and GDP growth improving, there has been a decline in governments’ crowdingout effect on private borrowings. This kind of macro-economic environment provides a favourable backdrop for the sector. We expect strong loan growth, driven particularly by higher-margin consumer business.

    Primarily by past lending to their governments and parastatals, African banks have a history of bad debts. But now they are cleaning up their books and increasing provisions, thus improving their risk profiles.

    Favourite Stock: Banque de l’Habitat, a Tunisian bank traditionally focused on the mortgage market and therefore ideally positioned to take advantage of the country's housing boom. Management is focused on growing its mortgage business while simultaneously cleaning up the book and adding to provision levels, thus improving risk levels.


    The only big players in this sector are SABMiller and Diegeo. With market shares of over 90% in most African countries where they operate, pricing power is a given. And with economic growth in Africa starting to pick up, they are also seeing higher volume growth.

    Until now, the penetration of the formal (or clear) beer market has been quite low, with more than half the market comprising traditional or home brews. The beer companies are penetrating this market through the introduction of lower-end brands. In Kenya, for example, Diegeo subsidiary East African Breweries was able to grow volumes by 20% in 2004 largely due to the ongoing success of its Senator entry-level brand.

    Favourite stock: Tanzania Breweries,a subsidiary of SABMiller and listed on the Dar es Salaam Stock Exchange. With market share around 97%, dominance is entrenched. Also, it is ideally positioned to take advantage of acceleration in consumption spending spurred by the higher GDP in Tanzania as Africa’s “growth darling”.


    Whether by government spending, private spending or aid flows, the housing and infrastructure boom across Africa is feeding through to cement companies and construction stocks. Most of these companies tend to have a local focus, except for Egypt, which is feeding the building explosion in the Middle East.

    Favourite stock: Orascom Construction Industries(OCI), an Egyptian cement and construction stock that is a play on both Egypt and the Middle East. It has recently set up cement production facilities in Algeria and Nigeria, where cement prices are up to four higher than in Egypt.


We have no doubt that careful investment in African stock markets will reward the shrewd and diligent investor. Yes, information is less readily available, which means you'll have to dig a little deeper and work a little harder. And yes, the stock markets are less liquid, which means you may lose a portion of your returns in exiting a stock that has gone up significantly. But by investing prudently, we’re confident that opportunities far outweigh risks.


Beyond the 15% of their funds that trustees can invest through offshore allocations, another 5% of retirement-fund portfolios can be invested into Africa through an appropriate listed pooling vehicle.

This additional 5% provides a unique opportunity for trustees to invest in the continent and bring greater diversification to their portfolios outside South Africa.

As the world warms to Africa, South African trustees need to think carefully about the continent in their investment strategies and ask their South African managers to identify some of the outstanding opportunities now being presented.