Africa: The Next Emerging Market?
Ten years ago, investors worldwide were investing in Brazil, Russia, India, and China (BRIC) in order to catch the strong wave of growth and development being predicted for those markets, particularly Brazil. Many investors still are seeking such opportunities. However, there are also many investors that believe the “next Brazil” is the continent of Africa, and they are striving to find an appropriate investment plan for this complex and under-researched continent.
Recent economic data legitimizes the optimism investors are showing for Africa. As of April 2010, funds focused on both the Middle East and North Africa (MENA) gained 7.76 percent year to date.1 Even more impressive was the 9.3 percent gain during the month of March. This is the highest monthly gain for the index since the inception of Hedge Fund Research’s coverage of the region.2 Also as of March, this index had a 12-month return of 28.31 percent.
Many economists believe there are various aspects of the African economy that are under-estimated and under-researched. These include countries such as Nigeria which has a very undervalued banking sector. Additionally, economists continue to stress that there is a great deal of opportunity within the oil, gas, and telecommunications sectors of Nigeria – which is thought to be one of Africa’s economic leaders behind South Africa.3
There seems to be positive sentiment for countries other than Nigeria as well. The continent’s lack of overall infrastructure, specifically in Kenya and seven other African nations, points to opportunity for wireless providers. Such providers and businesses are either entering the region or expanding their operations. Campaigns such as “One Laptop Per Child” is also fueling the continent’s growth in technological development and awareness.4
Some investors have looked to the 20th century for lessons in sound investments that they can take into the 21st. In hindsight, it was a wise decision to invest in Japan after WW II, in Southeast Asia during the 1970′s and, during the past 15 to 20 years, in BRIC countries.5 These were all frontier markets at certain points in time. Investors who see this consider it a no-brainer to invest in what is expected to be the next profitable frontier market. Although there are many investors with this belief, there are still many who greatly underestimate the African continent or simply don’t see sustainable growth potential.
Within the last month and a half, on several occasions, BHA research analysts spoke with investors seeking African-focused hedge fund managers. They included an investment consultant in the U.K., a corporate pension in Latvia, and a fund of hedge funds in Switzerland.
When speaking with the Swiss-based fund of funds, the CIO had a perspective on African markets that was unique because it was a combination of both positive and negative sentiments. On the positive side, he believes that investment capital will trickle down from the BRIC countries to the frontier markets, specifically Africa. He noted that there have been inflows of capital to the region and he expects it will continue. There are the obvious growth signals as well. First-tier African nations such as South Africa have a growing hedge fund industry and a well-advancing economy. Again, there are nations such as Nigeria with banks that are “dirt cheap.”.And Nigeria along with countries such as Angloa and Zimbabwe have extremely young populations that are consuming massive amounts of domestic products, a trend that is expected to continue to grow.
What was also intriguing to this CIO is that in a large portion of Africa, it is extremely difficult for businesses to obtain financing from banks and other lenders, which means they must be self-sufficient, using their own cash flow to grow their businesses. He also anticipates that those investors that missed out on the emerging market boom of the last 15 to 20 years will want to get involved in the “next Brazil”.
On the negative side, the CIO does not believe the region has long-term growth potential, and he recognizes that the great weaknesses and flaws in the continent cannot be ignored. These include a lack of infrastructure, a lack of national identities in the majority of nations leading to civil unrest, a lack of leadership, poor or inconsistent governance, and “huge” structural and operational issues in the countries’ governments and economies.
Although the CIO believes in the negative long-term effects of these weaknesses, he is striving to be a front runner in the wave of investor interest and capital toward the region. The firm has a two- to four-year bullish outlook on Africa, and feels that because the market capitalization within these markets is extremely small that an investor could double or triple an investment in a very short time period. However, he believes it is extremely important that investors navigate this region and time period very tactically with liquid investments. Private equity, which is illiquid, is very susceptible to the instability and economic risks, such as hyper-inflation, that have plagued certain African nations at times. He will be trying to ride this wave by seeking strong directional long-biased managers in the short term.
The next five to ten years are somewhat unclear for Africa. Investors will learn whether or not Africa truly is the next emerging market. It is clear is that investor interest and capital is entering the region, but it is not clear for how long it will last and if it will be sustainable in the long term.
1 HFM Week, “BRIC and beyond,” April 21, 2010, http://www.hfmweek.com/features/527447/bric-and-beyond.thtml.
2 Hedge Funds Review, “Investors wary of high-performing emerging market hedge funds,” May 20, 2010.
3 HFM Week, “BRIC and beyond,” April 21, 2010, http://www.hfmweek.com/features/527447/bric-and-beyond.thtml.
4 Wealth Daily, “Investing in Africa with ETFs,” March 8, 2010, http://www.wealthdaily.com/articles/africa-economic-growth-beats-forecasts/2363.
5 Hedge Funds Review, “Insparo Africa and Middle East Fund: Insparo Asset Management,” May 27, 2010, http://www.hedgefundsreview.com/hedge-funds-review/profile/1648929/insparo-africa-middle-east-fund-insparo-asset-management