Issue: June - Aug 2013

Opportunity abounds

African economies continue to grow faster than those in the rest of the world, offering a strong environment for earnings growth. Fungai Tarirah, head of Africa investments at Momentum Asset Management, points out that favourable demographic trends underpin significant opportunity for companies operating in Africa.

The United Nations has forecast that 22% of the world’s population will be living on the African continent by 2050. Being nearly as urbanised as China, by 2010 Africa already had 52 cities with over 1m inhabitants.

These demographics, coupled with a burgeoning middle class, mean that spending power on the continent has been rising rapidly. Improved stewardship and governance of African economies, as well as more stable political environments, are also creating a positive backdrop for wealth creation.

Increasingly, governments across Africa are exercising more judicious use of the proceeds from their nations’ abundant commodity wealth. This is also occurring as citizens are demanding a greater voice in the running of their countries. As a result, significant internal demand and robust growth in gross domestic product are being generated.

With the International Monetary Fund estimating that Africa will require an annual US$93bn investment to upgrade its infrastructure to levels comparable with the developed world, Africa is increasingly being viewed by powerful countries -- China, India and the US amongst them -- as a favourable investment destination for capital seeking superior long-term returns.

The hunt for yield and growth markets, against tepid prospects in their home markets, has seen capital from international investors and companies become more adventurous. Africa is a new repository. The flows of both foreign portfolio investment and foreign direct investment have risen sharply.

At the same time, countries across Africa are improving their legislative regimes to encourage investment. In some instances, they’re also allowing higher foreign ownership levels of local businesses.

Legislative changes aimed at promoting international investment interest include reduced business start-up times, accommodative dividend repatriation policies and increased public-private partnership opportunities. A recent example of the latter is the Zambian government and TATA Motors collaborating on the Itezhi Tezhi dam construction project to increase the country’s hydro-electric power capacity.

Tarirah . . . expect
strong growth

African economies benefiting significantly from foreign direct investment include Angola (crude oil), Ethiopia and Southern Sudan (mineral extraction and crop production), Kenya (technology advancements), Nigeria (consumer goods, crude oil and crop production), Uganda (crude oil) and Zambia (copper).

SA investors, although relatively slow to recognise the many equity-generating opportunities available in the rest of Africa, are contributing to infrastructure development particularly in counties comprising the Southern African Development Community.

Further, as part of its BRICS membership, SA is committed to act as Africa’s investment gateway.

Likely to generate good returns over the next 10 years are investments in infrastructure (e.g. road, rail and ports); extractive industries (mining) and beneficiation; import substitution (local production stimulus); technology and fast-moving consumables. Investors interested in leveraging investment opportunities on the continent should enjoy favourable returns by capitalising on them.

The structure of a portfolio, when considering African markets, will depend on the term of the investment. Shorter-term investors would want to focus on liquidity-generating investments that can be readily sold with minimal risk of capital loss. The real money, however, is to be made by longer-term investors who prefer to follow the various demographic, economic and infrastructure development themes prevalent across Africa with a view to seeing them through to completion and beyond.