Just a decade ago it was considered daring to allocate any
portion of your assets to China or even South America. Today most
investors have devoted a slice of their portfolio to the emerging
markets. But not all developing regions have been investor
darlings. Africa, widely perceived as a continent wracked by
poverty and political instability, has failed to attract the
investing public's attention. That should change soon, according to
Larry Seruma, manager of
Nile Pan Africa
. African nations have transitioned to free market economies
over the past 15 years, enjoy growing political stability and are
likely the last bastions of true growth in the emerging
Why should people consider investing in Africa?
There are several compelling reasons why investors should
include African exposure in their portfolios. The No. 1 reason is
that there are extremely compelling valuations to be found in
Africa. The average price-to-earnings multiple in the universe is
about 8, compared to 16 for the S&P 500. This ratio is also
extremely favorable when compared to other frontier and emerging
The other reason is historical performance and return. Over the
last decade, the African market produced an annualized return of
about 14 percent compared to 7 percent for the MSCI Emerging
Markets Index. On top of that, Africa experienced much lower
volatility compared to the broader emerging markets
Africa will continue to supply the rest of the world with a
broad range of resources, from iron ore to oil. That quality is
more important now than ever because the global supply of natural
resources is becoming more limited. As emerging markets such as
India and China continue to grow and mature, they will need the
natural resources that fuel economic growth. That new supply of
natural resources will come from Africa. As a result, African
countries will continue to receive foreign direct investment, which
will be used to develop their economies.
My last argument for investing in Africa relies on demographics.
There are 1 billion people in Africa and more cell phone users on
the continent than in the entire US market-but cell phone
penetration is only 37 percent. There's tremendous growth
potential, and that's true across most industries. About 40 percent
of the population is younger than 15 years old. But the most
important demographic shift is a swelling middle class that demands
more services. By contrast, the industrialized world has a much
older population that demands more health care. Africa's
productivity and the growth of the consumer class is an extremely
A good example of a company that has recognized these trends is
). The firm reorganized its business on the continent and created
GE Africa in order to take advantage of the growing consumer
What other factors beyond Africa's mineral wealth are
driving the growth of the middle class?
The biggest fundamental change in African countries can be found
in their fiscal policies. Most African countries over the last 20 y
ears have greatly reduced debt and liberalized their economies.
You're not going to find many PIIGS [the fiscally troubled European
nations of Portugal, Ireland, Italy, Greece and Spain] in Africa,
because these economies have been well managed for some time. In
addition, an improving legal and taxation framework have fostered a
strong investment climate, allowing African economies to compete
with other emerging markets.
What risk does political instability pose for
Political instability is a significant challenge, and African
markets should be evaluated on a country-by-country basis.
Politically unstable areas such as Zimbabwe and Somalia should be
avoided. But it's a mistake to see these troubled areas as
representing the whole continent. In historical terms, the
continent's political situation has improved dramatically. Nigeria
is an excellent example of this trend. Until 1990, the country's
government changed primarily through a series of military coups.
Since the 1990s, we've seen peaceful transitions of power. In face,
the most recent election in April is considered the fairest
election ever to be held in Nigeria. With a population of 160
million, Nigeria accounts for about a quarter of the continent's
population and is a prime example of the changes underway in
Northern Africa-Egypt, Tunisia, Sudan, Libya, Morocco and
Algeria-is largely populated by Arabs and is experiencing unrest.
Africa's Arab regions have long operated under different economic
and political structures than non-Arab regions of the continent.
These structures are being challenged, which may lead to some
I believe Libya will eventually split into two countries. The
turmoil in Egypt, however, will be resolved. Egypt has a far more
homogenous society than is found in Libya. Egypt also benefits from
two powerful forces. The first is historical: Prior to the recent
revolution, Egypt had been a very stable country with strong
institutions. If you invested in Egypt, you would have suffered
heavy losses, but you've never experienced outright expropriation
by the government.
The other positive sign for Egypt is its transition toward
greater democracy, though this is a very painful process. At
present, there is significant uncertainty over how the country's
political situation will be resolved. Egypt will hold parliamentary
elections in September and presidential election in November.
Most investors are waiting to see how these events unfold, which
means there's a high-risk premium for investing in Egypt relative
to other emerging markets.
Additionally, the market was closed for eight weeks due to the
political turmoil. As a result, gross domestic product (
) growth for this year will be much lower than originally forecast.
That means the Egyptian pound is extremely weak and there's' the
potential for more inflation.
But for investors with a long-term focus, there are tremendous
opportunities in Egypt as the country democratizes and wages
What investment opportunities have you found in
Guaranty Trust Bank
is a mid-sized lender with about USD3 billion in market cap. It's a
well-managed bank that pays a dividend of about 5 percent. An
investment in Guaranty Trust Bank provides exposure to Nigeria's
economic growth; the country's GDP is expected to grow about 8
percent annually over the next 10 years.
Nigeria has a growing middle class, a huge portion of which
lacks access to banking services-that's enormous growth potential.
More important, Nigerian banks have undergone a huge restructuring
in the wake of the financial meltdown. The industry has been
cleaned out, and the surviving banks will grow at a much faster
rate than before.
The consumer story drives growth for
(South Africa: MTN). With a market cap of USD34 billion, MTN
provides telecommunications services and operates in 21 countries.
The company holds a 40 percent share of the Nigerian market. In
2001 there were about 500,000 active phone lines in the country; by
2010 that number grew to 65 million-almost half of Nigerians now
have access to telephone services. Last year MTN paid out a
dividend yield of about 9 percent. The stock also trades at 20
percent discount to other mobile network operators. The company has
no debt and has tremendous growth opportunities as a provider of
data services. Data is a high-growth business in Africa because the
industry is essentially starting from scratch.
Africa's urbanization has led to a boom in new infrastructure
building. Regardless of whether these projects are located in Cairo
or South Africa, the main ingredient is cement.
(Egypt: OCIC) has two business lines-construction and
fertilizer-that each generate about half of total revenue.
The fertilizer segment addresses booming demand for agricultural
products and rising food prices. The construction business benefits
from tremendous growth in residential and commercial construction
and road construction. The demand for these types of services is
enormous and will only increase over the next 20 years.
What's your best advice for investors who are considering
adding African exposure to their portfolios?
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