The lowdown on investing in Africa

2013-11-24 10:00

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Widely regarded as a guru of emerging markets, Mark Mobius, executive chairman, Templeton Emerging Markets Group, has more than 40 years experience in emerging markets and a host of industry awards to his name. Neesa Moodley-Isaacs chats to him about investing in Africa

How have emerging markets held up over the past year?

Emerging markets were beaten up a bit earlier this year, but are now outperforming. The reality is that during the past 12 years, emerging markets outperformed developed markets, including the US, in all those years except two.

So our long-term conviction of the potential of emerging markets remains. We feel recent declines were overdone and based largely on irrational investor panic, and have viewed any pullbacks as an opportune time to search for bargains for our portfolios. We find valuations in many emerging and frontier stocks particularly attractive right now.

What is the current outlook for investing in Africa?

The region is becoming a focus for many investors, as this is where the growth is going to be very good in the coming years. Many African countries have great long-term potential, while intraregional links are creating some Pan-African businesses.

With this tremendous potential growth becoming increasingly available to investors, we believe that Africa could be the ‘emerging market’ story of the next decade. Rising incomes and middle class expansion in many countries have resulted in increasing demand for consumer products, leading to a positive outlook in earnings for consumer goods companies such as automobiles and retail, as well as services in finance, banking and telecommunications.

What are some of the ways for South African investors to invest in other African countries?

Individual investors can:

1. Invest directly in individual companies through the stock exchanges in other African countries. However, this can be difficult because it involves establishing a custodial account in each of the countries, which can be expensive and time-consuming. It also involves complications in dealing with illiquid securities, limited information and foreign exchange transactions.

2. Invest via African companies listed on stock exchanges around the world, such as the London, Toronto and Vancouver exchanges.

However, the selection is limited since most of these listings are for companies in the natural resources arena. This could be restrictive if you want to achieve the necessary diversification in your portfolio.

The best way for an individual investor to access African markets is by investing in unit trusts dedicated to Africa, of which there is a growing list.

We believe it is best to invest in a diversified fund with exposure across the continent. A long-term investment in such a fund should yield good results.

What is the role of dividend stocks in an investor’s portfolio?

Dividends are very important – and not just because investors like to receive the income they can potentially offer. Dividends can also be an indicator of good corporate governance.

If a company is giving dividends to shareholders and still has enough cash left over to expand and make required capital investments, then that is very positive.

We find companies with a history of paying dividends particularly attractive. If a company’s management team is focused on the best interest of shareholders, we think they can be more successful.

In addition, we know many investors are seeking income from their investments to meet a specific goal or to fund their post-retirement needs. Dividends can play a role here.

A prolonged period of easy monetary policies in many developed nations [particularly the US] has left income-seeking investors searching for an alternative to traditional fixed income, including dividend-paying stocks.

Given the current low yields of many traditional fixed-income investments, we think the dividend story remains compelling.

You were named as one of the 50 most influential people in 2011 by Bloomberg Markets Magazine. What are your top five tips for investors?

I would encourage investors to:

» Keep an open mind;

» Be patient;

» Avoid following the crowd;

» Look beyond negative headlines; and

» Maintain a well-diversified global portfolio.

What is your outlook on emerging markets?

Overall, emerging markets will likely continue to offer good long-term prospects for patient investors. There are always risks and unexpected shocks can occur. Despite the short-term outperformance of world markets, emerging markets have outperformed over the longer term and I expect this trend to continue. I believe emerging markets in general have three attractive characteristics, which haven’t changed despite recent volatility:

» Emerging markets’ growth rates have generally remained well in excess of those for developed markets and, overall, emerging markets are forecast to grow about five times faster than developed markets in 2013.

» Emerging markets generally have large and growing foreign exchange reserves, which are far greater than that of developed markets.

» The debt level of many emerging markets in relation to their GDP is generally much lower than that of many developed markets.

Name three emerging market countries to watch and tell us why.

Thailand: A fast-growing country that will provide very good opportunities. Thailand should also benefit from its membership in the Asean [Association of Southeast Asian Nations] group. There is a greater distribution of wealth. In the past, all the wealth was concentrated in Bangkok, the capital.

Now, with the new political structure, there has been an effort to get money out into the countryside and that’s been very good for the economy. In addition, the workforce is very intelligent, dedicated and hard-working, and tourism is booming.

Of course, there will be political setbacks from time to time, particularly concerning the possible return of the former leader.

Russia: In the past, Russia has had a bad reputation and many people are generally negative on the country. That’s usually a good signal because when things are unpopular, you can often get good bargains.

The valuations of Russian companies are very low and we think there are good opportunities. Also, the reform process is continuing and a lot of progress has been made in a relatively short period of time. Going forward, Russia will do well, provided that corporate governance improves.

South Africa: It stands out among its African peers with a large and liquid equity market. Moreover, a number of South African companies provide exposure to markets further north that might be difficult to secure locally. Of course, there have been mining strikes in South Africa, but we believe there are attractive opportunities for investors in both the mining and consumer sectors.

Many consumer companies are moving north into Africa and that’s where the big growth is going to be.

We are also excited about the management capabilities of South African entrepreneurs. If government makes the right moves to address the social unrest and encourages entrepreneurs, that could support the JSE going forward.

A continent powers up

The resource boom has included gas opportunities in Tanzania, oil opportunities in Kenya and oil opportunities in Uganda. These countries all have good economic growth, a young employment force and good population growth. However, there are some infrastructural challenges.

Peter Townshend, co-manager of the Coronation All Africa and Africa Frontiers Funds, says although a decade or two ago the popular perception was that Africa was “broken”, this view has now swivelled to a growing sense that the continent may finally be starting to power up.

“Africa holds many challenges for businesses, many of which relate to infrastructure – crowded ports, terrible roads, crumbling railways and no power,” he points out. Across most of Africa, electricity has to be self-provided with diesel generators at high cost.

For example, for banks in Nigeria, where every branch is diesel powered, electricity generation can make up 6% of operating costs.

“For telecoms companies in Africa, it is typically more than 10%. Management at one of Africa’s largest-listed brewing companies recently suggested to us that energy makes up almost 15% of their costs,” he says.

Secure, reliable grid power could result in a more than 20% increase in earnings for the brewer, while earnings would increase by more than 10% for Coronation’s Nigerian bank holdings.

Townshend says Nigeria is slowly moving through the process of a comprehensive deregulation of its power sector, splitting generation from transmission and bringing in private sector players. This could well lead to reliable and reasonably priced power becoming more widely available, which will reduce operating costs for Nigerian businesses significantly, making them more attractive investment options.

Andrew Lapping, fund manager of Allan Gray’s Africa ex-SA Equity Fund, says the past quarter was interesting for Africa.

“The activity in Egypt and Zimbabwe illustrated how political risk can influence stock market returns. Remaining rational and focused on company valuations, rather than market sentiment, is key,” he says.

For example, the recent Mugabe-Zanu-PF victory gave Allan Gray the opportunity to take advantage of investor fear. The Allan Gray ex-SA Equity Fund has investments in eight Zimbabwean companies.

“These are high-quality, attractively valued companies that dominate their respective sectors. The Zanu-PF policies add risk to Zimbabwean investments, but they also add to returns. The anti-business stance makes doing business difficult. All these factors lead to high returns for established Zimbabwean businesses,” Lapping concludes.

UNIT TRUST INVESTMENTS

One of the easiest ways to invest in Africa is via a unit trust investment.

We rounded up some of the options available:

» Coronation Global Emerging Markets Flexible Fund

» Investec Africa Fund

» Momentum Africa Equity Fund

» Old Mutual Global Emerging Markets Fund

» Prescient Africa Equity Fund

» Stanlib Africa Equity Fund

» Stanlib Africa Property Fund

» Templeton Africa Fund

» Templeton Emerging Markets Fund

» Templeton Bric Fund

» Dlamini is country risk analyst at Rand Merchant Bank

- Brian Dlamini

» This article was updated after first published to change Mobius' title on request of Franklin Templeton.

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