Category: Why Invest In Africa

The World Bank released its latest Global Economic Prospects report this month, and it suggests sub-Saharan Africa will again be among the fastest-growing regions in the world.

Seven countries, in particular, will lead the pack. According to the World Bank’s forecasts, each of them will grow at a rate of 7% or more over the next three years.

That’s cheetah-like pace.

Growth like that should allow for big reductions in poverty and lots of exciting opportunities for investors.

Here’s a countdown of Africa’s fastest-growing economies plus some tips on how to invest in each one.

Africa’s Fastest-Growing Economies

7. Ethiopia
Average GDP Growth (2014-16): +7.0%

What impresses me most about Ethiopia’s rapid economic growth is the fact that it’s already one of Africa’s largest economies. Its 2012 GDP was measured at $43 billion. Annualized growth of 7% suggests that its economy will add $10 billion to this figure in three years – that’s equivalent to adding the entire GDP of Zimbabwe!

An agricultural powerhouse, Ethiopia is now making big gains in the manufacturing and construction sectors, too. Labor productivity is on the rise. Students are staying in school longer. And family sizes are becoming smaller. All bode well for long-term growth.

How to invest:  Ethiopia isn’t yet home to an official stock exchange, but several firms listed on the Nairobi Securities Exchange in neighboring Kenya are anxious to expand there. Oil marketer KenolKobil has already done so.

UK leather maker, Pittards, which sources many of its hides from Ethiopia, trades on the London Stock Exchange. And Nigeria-listed Dangote Cement plans to open a manufacturing plant there later this year.

6. Tanzania
Average GDP Growth (2014-16): +7.2%

The discovery of vast offshore natural gas reserves is fueling Tanzania’s growth. But this is much more than a natural resource story.

A debt-wary government has kept inflation in check and promoted much-needed investments in power and transport infrastructure.

Moreover, Tanzania is second only to South Africa in terms of smart phone penetration, which suggests rapid gains in mobile banking and other financial services are likely in the offing.

How to invest:  The Dar es Salaam Stock Exchange is the purest way to participate in Tanzania’s growth, and it recently became more accessible when the government relaxed limits on foreign share ownership.

CRDB Bank is one of my favorite Tanzanian stocks. National Microfinance Bank and Tanzania Breweries also rank among the exchange’s most noteworthy shares.

Intrigued? Here’s a step-by-step guide to opening a Tanzanian brokerage account.

5. Rwanda
Average GDP Growth (2014-16): +7.3%

Is this the Sub-Saharan Singapore? The autocratic but undeniably effective government of Paul Kagame has transformed a destitute nation devastated by genocide into one of the most business-friendly countries on earth.

State of the art communications infrastructure, zero tolerance for corruption, policies that foster entrepreneurship, and a rapidly growing tourism industry all have the country positioned for long-term growth.

How to invest:  Rwanda’s fledgling stock exchange gives investors a couple of worthy opportunities; Bank of Kigali and Bralirwa, the country’s largest brewery. You can read some tips on opening a Rwandan brokerage account here.

Many Kenyan companies are also making big bets on Rwandan growth. The most prominent include Equity Bank, KCB, and ARM Cement.

4. Chad
Average GDP Growth (2014-16): +7.5%

Rapid economic expansion in dusty, landlocked Chad is driven by the exploitation of oil, which it pipes down through Cameroon to the Gulf of Guinea. This isn’t a great recipe for sustainable, inclusive growth. The vast majority of Chadians rely on subsistence agriculture, but the livestock, cotton, and gum arabic industries do hold some promise.

How to invest:  Prospective Chad investors have very limited options at present, especially if they’d like to steer clear of oil companies. But two Nigeria-listed banks operate in the country. Ecobank maintains a network of 14 branches there, while UBA Group has another three.

3. Mozambique
Average GDP Growth (2014-16): +8.4%

Ah, Mozambique. The land of idyllic beach holidays is now also home to huge offshore gas reserves. Their discovery and a planned LNG plant are two reasons why the country is likely to sport growth rates north of 8%. Big infrastructure projects and the resumption of coal mining in the northern Tete province will also contribute.

Unfortunately, these mega-projects have not, as yet, made much of a dent in poverty rates, and conflict between the ruling Frelimo and opposition Renamo parties is increasingly violent. A free, fair, and peaceful presidential election this October would do wonders for investor confidence.

How to invest:  Do you have cash that you’d like to spend some time in Mozambique? Then you might want to try the sleepy Bolsa de Valores de Mozambique.

The BVM is home to four stocks, including the local brewery (Cervejas de Mozambique) and Companhia Mozambiquana de Hidrocarbonetos, a firm with rights to develop the Pande and Temane natural gas fields. Contact one of the BVM’s licensed brokers to open a trading account.

2. South Sudan
Average GDP Growth (2014-16): +8.5%

Africa’s newest country makes this list mostly because it’s got upwardly mobile neighbors, relative stability compared to its war-wracked past, and because it essentially has nowhere to go but up.

The prospect of renewed civil war is significant, but the benefits that come from being the first-mover in an oil-rich nation of 11 million people have proven difficult for many East African companies to resist.

How to invest:  The easiest way to gain exposure to the South Sudanese economy is via a handful of regionally-oriented Kenyan stocks. The most prominent of this group is KCB Bank. It operates 19 branches in the country, and they contribute roughly 10% of the group’s profits. Others include CIC Insurance, Britam, and Equity Bank.

1. Sierra Leone
Average GDP Growth (2014-16): +11.3%

Thanks to the launch of some big iron ore mines, this little West African country is one of the fastest-growing countries in the world.

After a decade-long, diamond-fueled civil war, Sierra Leoneans know well that mineral wealth can be a curse as much as a blessing. So, the government is trying hard to diversify the economy and spread the benefits of mining development equitably.

Hundreds of kilometers of roads have been built or upgraded. More power has been added to the electricity grid. And reform is underway to reduce corruption and to provide free health care. After all its people have been through, Sierra Leone is truly a nation to root for.

How to invest:  Sierra Leone is home to a very nascent, illiquid stock exchange. Shares of the government-controlled Rokel Commercial Bank trade there, but, unless you live in Sierra Leone or are an extremely adventurous sort, you may be better off waiting a few years before opening a brokerage account there.

Alternatives include Nigeria-listed Ecobank, UBA Group, and Guaranty Trust Bank. All of which operate bank branches in the country. And Courteville Business Solutions, an e-commerce company that also trades on the Nigerian Stock Exchange, does substantial business there.

Your Turn

Do you know of other ways to invest in any of these fast-growing African economies? Tell us about them in the comments!

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So Long BRICS, Make Way for the KINGs!
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You’ve no doubt heard of the BRICS countries, the emerging market quintet comprised of Brazil, Russia, India, China, and South Africa.

You may also have been introduced to the MINTs, a grouping of fast–growing economic heavyweights that includes Mexico, Indonesia, Nigeria, and Turkey.

Now, in an excellent post published on Seeking Alpha, Belgrad Kenne, Founder and Director of equity research firm, Phase One Associates, has coined a new acronym that captures the dynamism of Sub-Saharan Africa’s frontier economies – the KINGs (Kenya, Ivory Coast, Nigeria, and Ghana).

The Seeking Alpha article lays out the rationale behind the grouping, but I asked Belgrad to give us a bit more insight into the KINGs’ stock market performance over the past five years. He graciously agreed and also shared his thoughts as to why he believes these markets make for a compelling investment opportunity.

His analysis follows.

***

The KINGs’ Ascendancy

Whether referring to MSCI country indices or local stock market indices, the KINGs posted a 39% USD-adjusted, price return in 2013. That is above all other MSCI leading indices and the S&P 500.

We note however that this performance has been volatile. Such volatility is not significantly different from that observed in most emerging markets. Therefore, dedicated emerging and frontier market specialists are expected to build-in and manage this downside risk.

Looking at local stock market indices, risk-adjusted performance suffers from the massive flight to safety that occurred in 2008 and 2009 during the financial crisis. In Kenya, losses were magnified as the period coincided with the 2008 post-election violence. These unprecedented outflows resulted in unprecedented losses after a bullish year in 2007 that attracted many opportunistic, foreign, non-frontier investors.

Strong Market Performance, Despite Volatility

Returns of Local Stock Indices in USD (2009 – 2013)

	Kenya	Ivory Coast	Nigeria	Ghana
5y. Cumulative	18.59%	47.71%	47.33%	42.43%
5y. Mean	7.49%	8.92%	8.73%	2.05%
5y. STD	25.6%	29.3%	38.6%	37.5%
5y. Sharpe	0.23	0.29	0.188	0.015

Source: local stock exchanges, Phase One Associates

The market crash observed in various KING countries during this period reminds us that these markets are vulnerable to external shocks partly because a considerable number of investors are foreign-based. As an example, foreign investors are estimated at 51% in Nigeria.

Therefore, despite the value and growth opportunities they represent, frontier markets including the African KINGs are reactive to market sentiment and externalities. This is particularly true in today’s context with ongoing speculation around the Fed’s policy shift in its quantitative easing program that will trigger outflows and/or slow inflows mainly from opportunistic, non-frontier investors.

4 Reasons to Be Bullish on the KINGs

Here’s why we’re bullish on each constituent of the KINGs.

• Kenya

Kenya will continue to be attractive in the near and medium terms, as the successful elections held last year have paved a way to an enabling socio-political environment that supports its dynamic economy, which has been boosted by the recent oil discoveries.

• Ivory Coast

The case for Ivory Coast featuring in the KINGs is not just a formality, but is appealing for several reasons. The country is not only UEMOA’s hub but also its newly found growth engine since the end of post-election violence in 2011. Economic activity has resumed, driven by key sectors such as: agriculture, consumer-related sectors and public spending on infrastructure. From 2012 to date the BRVM has gained over 66% of which 7% at the beginning of this year! Government gross debt has gone from nearly 95% in 2011 to an estimated 39% this year.

• Nigeria

Following Qatar and the UAE graduation into Emerging Market status this year, Nigeria will soon become the second biggest weight in the MSCI Frontier Market index behind Kuwait. This not only highlights its potential, but also positions the country to Emerging Market status in the medium term; a move that will increase visibility and liquidity as more capital flows in. This is an appeal to gain first mover’s advantage.

Ongoing reforms in the power sector coupled with infrastructure improvement will yield multiplier effects on the economy by reducing costs, improving margins, bringing in efficiencies. Overall, this will accelerate growth and open new opportunities for businesses and investors. Similar multiplier benefits are expected from the oil and gas bill. The country plays a leading role in the regional common market, ECOWAS, and many businesses are expected to further benefit from this growing trend of cross-border expansion.

• Ghana

Ghana is known for its democratic institutions and conducive business environment. Despite macro economic challenges in the near term, the country remains an attractive destination despite short-term macro economic concerns over widening deficits and double-digit inflation.

How to Ride the KINGs Coattails

Which of the KINGs industrial sectors offer the most upside?

We like the four Cs:

• Consumer-related sectors (FMCG, retail, banking, and breweries)
• Communications (telecom and IT)
• Construction (including cement companies)
• Commodities

Overall, these sectors’ key drivers leverage on strong commodities prices and a growing trend of consumerism supported by a rising middle class and rapid urbanization. These dynamics coupled with better politics and policies and improved corporate governance all contribute to strong corporate earnings, and, thus, attractive investment targets.

Here’s how their valuations stack up against their global counterparts.

Industry P/E Ratios vs. Global Averages

	Banking	Telecom	Breweries	Consumer	Retail	Construction	Agriculture
World	12.42	24.89	15.92	61.52	27.34	16.83	25.91
SSAfrica	9.29	34.64	22.6	53.93	28.56	13.5	9

Source: Reuters, Phase One Associates, October 2013

And, specifically, which blue-chip stocks play in these sectors?

A quick survey of the top performing Sub Sahara Africa-focused mutual funds revealed that most of them hold different percentage allocations of similar stocks in selected industries within the African KINGs. The usual suspects are summarized in the table below.

	Kenya	Ivory Coast	Nigeria	Ghana
Banking	Equity, KCB	ETI	GUARANTY, FBNH, ZENITH	EBG, GCB
Consumer		NTLC, UNLC	NESTLE, UNILVER, PZ	UNIL, FML
Breweries	EABL	SLBC	NB, GUINNESS	GGBL
Agriculture	BAT	SPHC, STBC	FLOURMILL
Insurance	JHK, PAFR			EGL
Telecoms	SCOM	SNTS
Construction	BAMB		DANGCEM
Mining, Oil &Gas			OANDO, FO
Media	NMG
Diversified	ICDC

We refer to these popularly-held stocks as the KINGs Index.

The KINGs Index is diverse across countries and sectors. Note, however, that it is biased toward large, liquid companies.

The ability to mix these blue chips with smaller value and growth stocks is the key differentiating parameter between high and poor performing frontier Africa portfolios.

Value is often found at the bottom of African market listings, with “neglected”, illiquid stocks outperforming large caps. In Nigeria, small cap stocks grew by 56%, followed by mid-cap 53%, whereas large cap stocks grew by 31% in 2013, according to the Nigerian Stock Exchange.

For those investors challenged by regulatory requirements that restrict their abilities to invest directly into KING markets, or for those who are uncomfortable with share illiquidity, here is a summary of leading South and Pan-African companies operating in the continent’s frontier.

	Banking	Telecom	Breweries	Retail	Insurance	Media	Agriculture
Leaders	Standard ABSA*	MTN Telkom	SABmiller	Shoprite Massmart	Sanlam	Naspers	Illovo Sugar

Source: compiled by Phase One Associates
* Now Barclays Africa

Despite having a significant geographic presence across the continent, most of these companies with the exception of the MTN Group still generate the majority of their revenue in South Africa. As an example, Shoprite is present in over 16 Sub Saharan African countries yet it generates only 12% of its top line outside South Africa, according to its 2012 financial report.

This so-called “marginal contribution per country” is fast growing, yet still low to justify full exposure to Frontier Africa.

Long Live the Kings

In sum, we believe that Kenya, Ivory Coast, Nigeria and Ghana presented as the African KINGs best represent Frontier Africa’s investment opportunities.

And companies that operate in the four “C” sectors: consumer goods and services, construction, communication, and commodities look particularly well-positioned.

We welcome your thoughts on Africa’s sweet spots and sweet stocks in 2014. Let’s hear them in the comments!

Belgrad Kenne is the Founder and Director of Phase One Associates, a research firm specializing in African Frontier Equity Markets.

Jonathan Kruger, an Africa Portfolio Manager, recently traveled overland from Nairobi to Cape Town in his native South Africa. The two-month journey took him through East Africa (Kenya, Tanzania, Malawi, Zambia) and Southern Africa (Zimbabwe, Botswana, South Africa). One of his aims was to experience at grass roots what is driving Africa’s economic future. He shared the following observations and impressions with InvestingInAfrica.net.

Kenyan Excitement

Landing in Nairobi one is greeted not by local dances, nor the trumpet of elephants, but an increasingly abundant bird, the Common Yellow Crane. Everywhere you turn they stand towering over construction sites, bringing new commercial buildings and apartments to life.

One cannot ignore the Kenya’s busyness. Everyone seems to be getting on with something: digging away at new roads or buildings, selling goods or heading somewhere with a determined look on their faces. Kenyans seem resolved to create a better future for themselves one brick at a time, or one app at a time, as they code away in the new Nairobi Innovation Centres.

Uhuru Highway is jam-packed with trucks heading from Mombasa, through Nairobi, and deeper into the continent to an eagerly waiting , and growing consumer class.

It’s not just the trucks that bring prosperity. The much hailed mobile money service Mpesa sends purchasing power into rural areas via cellphone networks. No longer is Kenya painted by the red of Coca-Cola but the green of Safaricom as cafes and all sorts of small businesses eke out an extra margin by acting as Mpesa agents. Meanwhile, Equity Bank agents sprout from every corner as agency banking takes off, mostly eliminating the need for formal branches or ATMs.

At the time I traveled through Kenya, the national elections were imminent and you couldn’t find a more patriotic people. Kenyans were glued to their seats as they watched or read about the presidential debates between the main contenders, Raila Odinga and Uhuru Kenyatta. Discussing real issues and how they intend to solve them is a far cry from South African politics with its dancing and role-playing. With the wounds of the 2007 election violence still hurting, politicians and voters stated their commitment to peaceful elections.

Rumbling Through Tanzania

The Namanga border into Tanzania is a mess, not in an administrative sense, but rather as construction workers scramble to complete the new buildings. A United Nations sign alerts one to foreign involvement. Boosting inter-regional trade seems to be more than just jaw-wagging by politicians and economists. These developments are set to dramatically shorten border crossing times and reduce the cost of business. Truck drivers told us it previously took six hours to cross the border. Now it takes less than an hour. We got through in 15 minutes.

While Kenya appears to be advancing at a staggering pace, Tanzania appears to be a bit behind the curve. Arusha (gateway to the Serengeti) is a stark reminder of the pressure wide-scale urbanisation is putting on aging infrastructure. Seemingly disorganised markets compete for space with formal businesses (such as Shoprite and Standard Chartered Bank). Driving past the United Nations Criminal Tribunal for Rwanda (ICTR) is a reminder of Africa’s painful past. After 20 years, the work of the court is complete and the institution will close its doors in 2014.

When entering Dar Es Salaam one is greeted by massive billboards advertising beer, electronics, banking and apartments to name a few. Tanzanians are demanding more than cassava (the local staple food) as they attempt to trade up to their new found tastes. The Common Yellow Crane can be seen towering over some rising skyscrapers. Less visible are the sharks ready to offer unsecured loans at ludicrous interest rates to consumers facing the allure of modern appliances.

Friendly Malawi

Malawians proved to be extremely friendly, always willing to return a wave as they rode past on their bicycles, sometimes with cellphone in hand. Lake Malawi was incredibly beautiful. The poverty was not. Traditional African problems were clearly evident: high HIV infection rate, poor education, lack of water and housing, poor infrastructure and a handout culture. Many spoke of hope in South Africa where relatives have sought refuge.

The New Joburg?

Johannesburg appeared to arrive too soon. We were greeted by familiar sights: shopping malls, modern roads, apartments, luxury hotels, Afrikaans accents and South African shops (Shoprite, Mr Price, Spar, Woolworths, FNB to name a few). I had to pinch myself to realise I was in fact in Lusaka, Zambia. Boom. The population has trebled in the immediate post-independence era. Foreign companies are flocking to the area to reap the “demographic dividend” the city has to offer. Chinese letters adorned buildings, and a sign saying “This road was donated by the Republic of Japan” clearly marked the East’s presence.

Herero Technology

Zimbabwe is incredibly beautiful, going nowhere slowly and desperately needs a regime change. Enough said. A final tale comes from an interesting chat I had with a Namibian business women (see picture) from the Herero tribe. She uses her solar charged cellphone (on MTC’s network) to run her craft business in an extremely remote area near Uis. The device is key to ordering materials and finding out when tour buses are arriving.

The African road may be bumpy but pockets of progress are spreading across the continent.

If you’d live to hear more of Jonathan’s insights on investing in Africa, follow him on Twitter @InvestorPumba.

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