Sub-Saharan Africa Has and Deserves to Avoid another Lost Decade.

In one of my previous posts ("Can Greed Save Africa?"), I shared a remarkable report on a series of very profitable business ventures undertaken in some of the rare spots on the African continent. A couple of week ago, I was delighted to read two FT articles with very meaningful titles: "Investors start a new scramble for Africa" by Robin Wigglesworth and "Global inflows to Africa at two-year peak" by Alessandra Stevenson and Andrew Browman.

In the aforementioned post, I celebrated the evidence that human greed and capitalism, even if to the extreme might in the long run construe a viable solution to African's poverty curse, whilst building the fundamentals for private sector initiative in the short term. 

The global financial crisis did dramatically reduce some of the capital inflows into the continent's bourses, shielding Sub-Saharan Africa from its proper form of financial bubble which nearly brought the global economy to its knees. 

In the meantime, when US and EU investors were staying in their office to speculate on the African's future, Chinese investors were scrambling to position themselves on the continent. It is an exception today if you have the chance to know about a Sub-Saharan African country without a Chinese stampede. The Chinese model is aggressive, involving state-owned giants in the likes of Sinopec, the communist state Sovereign Wealth Funds and the private sector. 

Thousands of Chinese youngsters are leaving their countryside to the African continent, with limited or no capital to start with. They are coming in thousands as low-skilled workers for Chinese companies, chartered straightly from Chinese provinces to Angola, Mozambique, Kenya, Cameroon, Guinea, Congo, etc. In parallel  a large flux of them are also joining the African private sector doing the little jobs Africans are starting to snob, selling all kind of things to make a living. These new citizens are contributing to  build the fundamentals of a vibrant private sector. They are starting to build a middle class generation of Chinese in Africa, they are adding to the resentment of African load of poors,  contributing to enlarge the gap between the few rich and the huge majority of dispossessed. 

You are starting to hear about the idea of building technology or service, food or agricultural hubs in Sub-Sahara Africa. Kenya, Uganda, Rwanda are amongst the countries in East Africa which have retained much interest from pioneer investors over the last decade. These countries have been sowing the seeds of tomorrow harvests, they are surely on the right path and their political elite need to work hard to keep the momentum up. 

A historic peace agreement signed last week between Congo and Rwanda under the auspices of the African Union is welcome, it needs to be celebrated and protected by all regional leaders of goodwill. A challenge by Mamphela Ramphele, a prominent female leader, to the ANC arrogant and male dominated leadership is a great thing adding much needed momentum to the black continent's business renaissance. The killing in Mali, announced today, of Al-Qaeda's leader on the continent adds a certain degree of hope that the much awaited political stability might be seeing some light out of the tunnel. Sub-Saharan Africa has and deserves to avoid another lost decade.  

I am delighted to share the content of the two aforementioned FT articles by its African correspondents.

Please feel free to add in your comment.

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It is the ultimate in risk versus return. Hunters of investment exotica are heading to Africa, where some of the world’s riskiest markets are enjoying big gains.

After trailing behind more mainstream markets for the better part of a decade, so-called frontier markets as defined by index provider MSCI have climbed more than 8 per cent already this year – outpacing both emerging and developed stock markets.

That is quite a turnround. Before the global financial crisis many frontier market investors favoured countries such as Vietnam, and regions such as the oil-soaked Gulf.Vietnam, Dubai, Argentina and Kazakhstan have all enjoyed a robust start to the year, but fund managers argue that the real frontier market stars are Africa’s bourses.
“There is a second scramble for Africa under way,” says Richard Gush, head of Bank of America Merrill Lynch’s South African operations.

The larger sub-Saharan markets have been the primary beneficiaries. While some smaller markets, such as Namibia and Zambia, have languished, Nigerian stocks have returned almost 63 per cent in US dollar terms during the past 12 months, Kenya’s Nairobi All-Share index has returned 46 per cent and Ghana’s market has climbed more than 17 per cent.

Nowadays, it is Africa that is the continent on investors’ lips, notes Zin Bekkali, chief executive of Silk Invest, a boutique asset manager. “When the frontier markets story started before the crisis people actually tilted away from Africa, but these days that is where they want to go above all,” he says.

Investing in the continent’s stock markets can be a turbulent ride, because of the underlying shares and the choppiness of exchange rates. For example, Namibia’s market is up about 8 per cent during the past year, but down 10 per cent in US dollar terms.

The economic gains of many African countries are also linked to commodity export booms. Sceptics caution that if that unravels, growth – and investor prospects – will be dented.

The limited size and depth of the markets are also a challenge. Ashmore estimates that, excluding the South African market, there are about 250 investable companies across 17 exchanges worth roughly $250bn. But this makes the overall market smaller than Denmark, and about the same size as the Philippines.

Trading volumes are woefully low by international standards. Even Nigeria’s stock exchange, the busiest in sub-Saharan Africa apart from South Africa, only sees $40m of shares change hands a day on average. Investors therefore face difficulty exiting larger investments. Even access can be a technical challenge in some markets.
Yet some fund managers are still attracted to African equities. While the developed world faces years of economic torpor and painful deleveraging, and in some larger emerging markets growth is slowing, many African countries are enjoying an economic renaissance.

Asset managers say African shares are cheap. Even after the recent run, most exchanges are only now trading at roughly the same or slightly lower forward-looking price-to-earnings ratios as emerging markets.
Julie Dickson, a fund manager at Ashmore, argues that the rally should be sustained by still-compelling dividend payments. She estimates that the dividend yield is about 6 per cent on average in Africa, compared with about 3 per cent in emerging markets.

African markets also offer some diversification away from the risk-on, risk-off forces that have dominated global markets. Although frontier markets can be highly volatile, they largely move independently of events in the US or Europe – an attractive characteristic for many fund managers, points out Russ Koesterich, chief investment strategist at BlackRock.

In fact, the main driver of African exchanges recently appears to have been big global and emerging equity funds taking “off-benchmark” positions in local companies – not necessarily inflows into dedicated frontier and Africa-focused funds. These emerging market funds take small positions relative to the assets they control, but their size means bets can have a big impact.

Nigerian Breweries, for example, boasts a list of shareholders that includes Franklin Templeton, Oppenheimer and Fidelity, via their emerging market funds. That has helped its shares rally almost 80 per cent in US dollar terms during the past year. “There are definitely a lot of off-benchmark bets by global emerging market funds, which is a bigger story than dedicated frontier market funds,” says Richard Lacaille, global chief investment officer at State Street Global Advisors.

Nonetheless, history has shown that the appetite of international investors for frontier markets such as those in Africa is fickle. If appetite for risk evaporates again, money could pour out quickly.

Paradoxically, more international investment will also gradually increase the links between local bourses and global markets, lessening one of the big attractions of African stocks. Ms Dickson says the potential returns are worth it: “You just have to do your homework.”

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International inflows to African equities are at a two-year high as investors seek exposure to the region’s growth story.

Money flowing into Africa-dedicated equity funds in the final month of last year reached $878.4m, the biggest monthly inflow in just over two years and four times the amount in the previous month, according to data provider EPFR.

The increase in demand has prompted index providers such as FTSE and MSCI to create more focused indices catering to both institutional and retail investor demand.Weekly flows for the month of January, which have not been consolidated, are expected to be higher, the data provider said. FTSE launched a pan-Africa ex-South Africa index last month and said it was investigating the launch of regional and national indices in the near future.
“There’s no doubt that managers are being forced to look further afield for returns. Estimates for growth across Africa are very handsome compared to richer countries,” said Jonathan Cooper, managing director at FTSE Group.

The FTSE ASEA Pan Africa index covers 13 countries in North and sub-Saharan Africa, excluding South Africa. Sebastien Lieblich, global head of index management at MSCI, which launched its Emerging Frontier Markets Africa index in 2007, said the group was also looking to expand its Africa offering. "There is an increasing appetite for Africa, from African investors wanting to invest, but also international investors wanting to get increased exposure,” said Mr Lieblich.

The MSCI Frontier Markets Africa index includes Nigeria, Kenya and Mauritius. However, he added, many of the region’s equity markets that have generated demand, such as Ghana, Botswana and Zimbabwe, were not yet ready to be included in regional indices because there were not enough publicly listed companies on the stock exchanges to offer in an index.

“We’re monitoring all these markets but for now they are all characterised by one really big company. We’re eagerly waiting for some initial public offerings,” he added. While equity capital markets activity picked up in 2012, with $4.5bn raised through equity markets in sub-Saharan Africa, volumes are still less than half of those before the financial crisis, according to data from Dealogic. 

Meanwhile, retail investors’ appetite is also picking up. BlackRock, the world’s largest fund manager, launched the first exchange traded fund for US investors focused on frontier markets in September. It now has $39m under management.

“Driven by a growing consumer class and a rich supply of natural resources, investors are seeking exposure to the frontier markets,” said Daniel Gamba, head of iShares Americas institutional business at BlackRock. He said there was specific interest in exposure to African markets such as Nigeria and Kenya.