Sizing Up the Real Risks of Investing in Africa
WHAT IMAGES DOES AFRICA conjure in the mind of the average Westerner? Probably skinny children in dire poverty, corrupt dictators and, thanks to Hollywood, blood diamonds. Africa doesn't get much attention in the West beyond that. During South Africa's successful World Cup this summer, for example, many news reports focused on vuvuzelas and few on the capable management of the event itself.
China Raising the Stakes in Africa: China's trade with sub-Saharan Africa has expanded by a factor of about 10 in the past decade. China is importing mostly commodities and exporting infrastructure and machinery, among other things
.Likewise, the noisy financial crises in the developed financial markets appear to have drowned out a decade of impressive and sustained economic and institutional progress in sub-Saharan Africa. (See table: A Decade of Improvement.) To many Western investors who don't look past the stereotypes, Africa is terra incognita. Their ignorance could cost them plenty in lost opportunity.
That depiction is increasingly mistaken.
"Africa suffers from misconceptions more than any other area in the world," argues Miles Morland, whom many consider the father of fund investment in Africa. He founded Blakeney Management in the early 1990s, and now is chairman of Development Partners International, a London-based private-equity firm that invests in Africa.
Perceptions based on the way Africa once was linger in the minds of many investors, he says. The U.S. and U.K. effectively have nationalized more companies during the financial crisis (think GM, Chrysler, AIG, Citigroup, Royal Bank of Scotland, Northern Rock) than African nations have in the past nine years, he quips, and national debts are far less worrisome there than in America or Europe.
"Funnily enough," Morland continues, "people wearied by bankruptcies, meltdowns, restructuring and bank bailouts are amazed to learn about a continent that has transformed itself into one of the fastest- growing regions in the world, where banks haven't needed bailing out, no large companies have folded, with no accounting scandals and where the biggest problem businessmen have is getting capital to finance growth."
He is seconded by another investor with decades of experience, Donald Elefson, portfolio manager of the Harding Loevner Frontier Emerging Markets Fund (ticker: HLFMX). Among frontier regions, Africa is the most interesting, he asserts, because it offers strong markets with huge potential, liberalizing policies, good capital flows and undiscovered high-quality companies. And Nigeria is one of his favorite frontier countries. He contends that the giant nation of about 150 million people eventually can fill the same leading role for Africa that Brazil has played for emerging markets.
Like Brazil, Nigeria hasn't liberalized its petroleum and telecom industries yet, and its stocks in those sectors will benefit whenever that happens. Again like Brazil, Nigeria has grown strongly, even though its banks curbed lending last year. Whenever the banks ratchet up lending, that will further fuel growth. (Nigerian regulators recently forced some banks to take bigger-than-expected write-downs on loan losses. That hurt reported earnings, but has removed a nagging issue and will help future profits.)
Indeed, after a big drop from boom highs in early 2008, African stock markets—despite their problems—now offer the long-term investor a number of fast-growing companies with stocks that sell for about 11 to 12 times trailing 12-month earnings per share as of June 30, according to S&P Indices. They look inexpensive compared with price/earnings ratios in most developed markets or even in the broad world of emerging markets, where the average stock fetches 15 times trailing profits.
With many economies on the continent growing 5% to 8% annually, according to the International Monetary Fund, investors can find banks, brewers, supermarket outfits and mobile-phone companies with good prospects, decent balance sheets and relatively low P/Es (especially compared with their growth potential). Some have few rivals, provide important consumer services and boast profits that are growing faster than their homelands' economy.
IF THE WEST HASN'T NOTICED this big change, China has. With relatively little fanfare, it has made a huge foray into Africa. China's rapidly rising middle class isn't just pulling itself up by the bootstraps, but also is creating demand for resources from Africa. That's helping to raise income levels on the vast continent, as well.
Africa's bounty of natural resources, such as oil, iron ore, gold, copper and numerous others, have brought in strong trade flows from the Asian giant, with $88 billion in 2008 in exports and imports between the two, up 10 times from 2000 (see table, China Raising the Stakes in Africa). In return for those commodities, China is building seaports, power plants, roads and other infrastructure projects, which should help sustain the growth in gross domestic product expected in many parts of the sub-Sahara. Africa's economy is growing at a tiger-like 5% to 8% pace, versus 4% for countries like Russia and Brazil. And the IMF has been nudging up its forecasts for Africa.
There are compelling long-term trends on the continent, says Razia Khan, the London-based head of research on Africa at Standard Chartered, a U.K. bank with businesses in many emerging and frontier markets. Political stability and economic policy has improved. Consumption is rising, with the working-age population expected to hit 65% of the total population in 2050, versus about 50% now. And new capital, some from investment funds, is coming in. Africa's debt and foreign-exchange markets are opening up, too, Khan adds, another encouraging sign. Over all, "Africa is becoming more accessible" to Western investment.
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