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Africa’s emerging story


After the problems of New Star’s Heart of Africa fund, many investors are understandably cautious about this investment frontier. But its plentiful opportunities are clear and experts are hoping that the summer’s World Cup has dispelled impressions which are decades out of date.

While not the best tournament in football terms, most believe South Africa – and the whole region – proved itself worthy of taking to the world stage.

Sharat Dua – who runs emerging markets specialist Charlemagne Capital’s Magna Africa fund – said the cont-inent is effectively split into three segments – South Africa, northern countries such as Egypt and Morocco and the biggest sub-Saharan area.

Several funds have opted not to invest in South Africa but Dua considers this a mistake because of the country’s own emerging status and favourable geographic position to expand into other African nations.

He says: “South Africa is still very much an emerging story itself, with a large segment of the population just moving into the consuming stage.

“Before the financial crisis, 300,000 people a year were rising from lower-income bands to the middle class and, while the slowdown halted this, it will re-emerge as a theme. South Africa’s banks are also targeting the very lowest income groups – largely rural dwellers who have never had a bank account – bringing them into the economy for the first time.”

Dua says the northern countries are largely a demographic play, with the young population consuming according to cultural trends.

In Egypt, for example, one million people turn 21 each year and, with most getting married in their early 20s, there is a powerful tailwind behind areas such as housing, cars and consumer goods.

Dua holds stocks such as GB Auto to play this theme, with the average car on Egyptian roads 17 years old and the Government introducing policies encouraging people to trade up.

Dua says: “Egypt and other northern countries are also well positioned as a hub for the Mena region, with the Middle East benefiting from demographic shifts.”

Finally, Sub-Saharan Africa is by far the biggest part of the continent and Dua sees it as primarily as a commodity-related story.
Several of these countries are rich in resources – oil in Nigeria and copper in the Democratic Republic of Congo, for example, and have recently developed links with commodity-hungry nations.

Dua says: “Corruption is still clearly at work in many of these countries – some worse than others – but the picture is improving and many leaders have used commodity wealth to improve their fiscal health and repay debts.

“Growing surpluses are typically channelled into infrastructure projects, crea-ting jobs and steady income for more of the population. This creates a need for a bank-ing system and eventually a credit culture, introducing a consumer side to these commodity economies.”

Magna Africa targets 50-55 per cent in South Africa, around 20 per cent in Egypt and 10-13 per cent in Nigeria, with the rest spread across other countries subject to liquidity constraints.

Charlemagne has a rule that 75 per cent of the portfolio can be exited within five days and is therefore restricted from some of the less developed markets in the region.

Dua was keen to invest in Ghana before the credit crunch, for example, but had to revise that as liquidity dried up.

Looking at key themes on the portfolio, infrastructure remains important as an investment in its own right as well as a vital part of the path from commodity wealth to full economies.

According to Dua, most of the infrastructure companies are in South Africa – which enjoyed a busy period building for the World Cup – but are looking to develop across the continent.

This can also be seen in areas as diverse as telecoms, banking and even consumer, with Nigeria the biggest market for South Africa’s telco firm MTN, for example.

Overall, Charlemagne sees Africa as an uncorrelated investment against global equities, with strong demo-graphic factors in place.

He says: “South Africa went into recession after the credit crunch but Africa proved largely insulated so the region can thrive even if we see a global double dip. Most econ-omies were affected by the rise in risk aversion but Egypt and Nigeria both produced GDP growth of over 4.5 per cent in the year to June 30 last year and structural factors suggest this can continue across the continent.”


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