The FT Of London Is Bullish On African Investment

Lazy mindset misses African growth story
By John Dizard
Published: October 31 2010 10:54 | Last updated: October 31 2010 10:54
My conservative value investor friends have a permanent sneer for portfolio managers and analysts who have yet to survive a full economic cycle. How can these schoolchildren understand the world?

There’s also a problem, though, with being too old, and imposing a 1970s template on the financial world. One example of this would be how even worldly and experienced investors in the developed world consider assets in Africa, particularly sub-Saharan Africa. In the back, or even front, of their minds, the continent’s driving technology is the Kalashnikov assault rifle. They don’t seem to have grasped that those are finally rusting away, largely replaced with mobile phones.

EDITOR’S CHOICE
Bypass burden-sharing bank bonds - Oct-24

Iceland is hotter than you might think - Oct-15

Debate over shale gas decline fires up - Oct-10

New banking opportunities open up - Oct-03

For-profit school battlers dig in heels - Sep-26

Speculators hanging on actuarial stats - Sep-19

I grew up surrounded by international do-gooders. Much of the foreign aid they advocated came in the form of free food imports (that impoverished local farmers) or consulting contracts (that paid for their graduate theses).

In Africa, neither Soviet, nor American and European foreign aid transformed the continent. Instead, the aid tended to inflate the parasitic elements of the post-colonial state structures. When that created internal conflicts, the secret services of all sides got involved, with miserable results. To the degree the leaders’ money came from foreigners, they had less reason to pay attention to the needs of the public. Development handed down from above did not work.

What is working now, and what is creating a sustainable expansion of investable African opportunities, is growth from below. Yes, Africa is a commodity exporting continent, and it is earning much more from exports of metals, oil, and agricultural commodities.

This leads even those investors who do think about Africa to think of it as subset of the “China story”. China needs copper, iron, coal, and oil. Africa has these. When China needs less of those, then Africa sinks back.

That is lazy thinking, contradicted by the continent’s gradually more reliable economic statistics. According to a McKinsey Global report on African growth published earlier this year, income from natural resources, and government spending they paid for, accounted for 32 per cent of the continent’s GDP growth between 2000 and 2008. The rest of the continent’s real compounded annual GDP growth of 4.9 per cent came from growth of internal sectors, including transport, telecommunications, more efficient wholesale and retail, and manufacturing.

Francis Daniels, a portfolio manager from Ghana who works out of Johannesburg, South Africa, says: “If the China growth story stops, African growth would be dented, but I don’t think by more than two percentage points. No way would it put Africa into recession.”

Thanks to the well-publicised failures of African state structures, which in turn exacerbated natural disasters, the continent’s economies are actually under-borrowed compared to their productive capacity.

Local companies are now taking the lead in the rapid growth of internal African markets, and their returns are often extraordinary. Take Sonatel, a Senegalese mobile phone company with a market capitalisation of $2.9bn, $700m in operating cash flow, and a return on equity of 38 per cent. It has a dividend yield of 8.8 per cent, and a price/earnings ratio of less than 8. Even while paying that dividend, it’s continuing to expand elsewhere in West Africa. By the way, the dividend is paid in CFA francs, which are pegged to the euro. You may find growth stories like that in Asia, but they’ll be a lot more expensive.

The same mobile phones that are improving the efficiency of internal markets are also improving the political culture. States that don’t have an information monopoly tend to become more democratic and responsive. That makes portfolio investment safer.

There is still relatively little actively managed international portfolio investment dedicated to Africa, and much of that goes to South Africa, the continent’s industrial and financial centre. Liquidity is an issue; when the 2008 crash happened, valuations in countries such as Ghana stayed up for months because there were just no transactions.

Mr Daniels, a lawyer before turning to portfolio management, uses a closed end fund to manage the liquidity risks for his Africa Opportunities Fund. The fund has about $37m in net asset value and trades occasionally on London’s AIM, with a discount to its NAV.

Established in 2007, AOF took a hit to both NAV and its discount rate after the 2008 crisis, taking a 42.8 per cent mark for the year. Its NAV then rose by 45.3 per cent in 2009, with a shrinking discount raising the share price increase to 111.7 per cent. So far this year the NAV is up by 19.5 per cent. Clearly, with such a small float, any significant share purchase would spike the price and shrink the discount, which is now a bit over 25 per cent of the value. As Mr Daniels says: “Africans have learned many bitter lessons, which have made them more inclined towards free markets and democracy. They know what doesn’t work.”