June 6, 2011

Africa: Illuminating the 'Last Bastions of True Growth in the Emerging Markets'

In the June issue of Louis Rukeyser’s Mutual Funds, “the Rukeyser Interview” checked in with Nile Capital Management’s Larry Seruma, who discussed how the investment spotlight is shifting towards Africa to illuminate “the last bastions of true growth in the emerging markets.”

The interview highlights a number of reasons why we believe Africa is a compelling destination for investment capital.  It points to the fact that the valuations in Africa’s markets are compelling relative to US as well as other emerging and frontier markets.  Thus, on a relative basis, stocks which trade in Africa’s markets are at a significant discount to their global peers and could experience significant upside.

The article points out that the strong performance of Africa’s markets, noting that over the past ten years Africa’s markets have done significantly better than other emerging markets, with lower volatility.  In fact, Africa’s low correlation of returns intra-continent, as well as its low correlation to other global markets, means that adding an Africa only investment to one’s portfolio would have actually decreased volatility over the past ten years.  Thus, Africa potentially allows investors to gain additional exposure to emerging markets in their portfolio without having to take on additional risk.

In addition, the article points out that while the industrialized world is scrambling to find new sources for oil and other natural resources, investors will find that Africa’s substantial deposits will become ever more compelling in the global marketplace.  Thus, natural resources will present a sustained driver of economic growth in Africa for some time.

The interview also emphasizes that the demographics of Africa make it a compelling destination for investment capital.  It notes that Africa has a “swelling middle class” and a young population (40% of the population in Africa is under the age of 15), which means an increasing number of productive workers and an increasing consumer population (read here). As a result, the interview notes that Africa has an advantage over nations like the United States, where the population is older, and less poised for growth. 

Africa’s large and youthful middle class has and will necessitate strong and stable growth in banking, construction and infrastructure.  The article notes that both physical infrastructure and digital infrastructure are critical sectors to watch, highlighting that “Africa’s urbanization has led to a boom in new infrastructure building” for which “the main ingredient is cement.”  For Nile Capital Management, this presents opportunities in a number of names which provide building materials and construction services. 

At the same time, the article notes that “there are 1 billion people in Africa and more cell phone users on the continent than in the entire US market—but cell phone penetration is only 37 percent.”  Digital infrastructure is for many investors in Africa a touchstone, as it has seen remarkable growth in a relatively short period of time, and the industry remains poised for strong growth for years to come.

The article also highlights some specific investment opportunities which we find compelling, notably focusing on names in the infrastructure and consumer growth spaces.  It also reminds readers that while Africa offers incredible opportunities for investors, its economic and systemic diversity can make investing intricate.  Notably, Nile Capital Management often emphasizes that investing in Africa requires a detailed knowledge of the diverse countries and sectors which make up the investment landscape, and is best suited for investors with a long time horizon.  Although there is substantial potential for investors on the continent, these barriers make it more prudent for investors to seek managers who understand the investment landscape and can effectively manage risk. 

To read the full interview, please click here.

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com.

Nile Capital Management: We know Africa - from Cairo to Capetown

June 2, 2011

Ernst & Young Says: It’s time for Africa

In a report recently released by Ernst & Young, the global accounting firm has predicted that foreign direct investment in Africa could reach $150 billion by 2015 (from $84 billion in 2010).  The report noted that Africa is becoming increasingly attractive as international investors seek new opportunities for growth, and pointed out that “while Africa’s challenges are well documented, there is an increasing recognition that the continent is on an upward trajectory; economically, politically, and socially.”
The report most notably highlights a study of the perception and outlook of a panel of 562 decision makers from around the globe.  The individuals surveyed where, according to E&Y were “divided into six main sectors” and “representative of the key African and global economic sectors,” these sectors are:
services, consumer products
raw materials
real estate/construction

The results of this survey are quite telling.  Of those surveyed, 86% said that they believed Africa has become more attractive over the past three years – greater than the 66% increase for Asia, and 45% and 38% respectively for Europe and North America.  In addition, 88% of respondents believe that Africa will become more attractive over the next three years, versus 79% for Asia, 53% for Europe, and 60% for North America.
African Investing
Of perhaps even greater interest is the perception of Africa going forward.  88% of survey respondents claim that over the next three years they believe Africa’s attractiveness will improve.  In contrast, only 60% of respondents believe North America will become more attractive in the next three years, and 53% believe Europe will.  Even Asia lagged Africa, with 79% of respondents believing it will get better, but 18% expecting it to not change (compared with 8% for Africa).
African Investing
Finally, the survey also attempted to quantify respondents’ intentions for business in the continent, with similarly upbeat results.  Of those surveyed, 43% said that they plan to invest in Africa in coming years, and an additional 19% plan to maintain operations. 
Of course, 29% of respondents also said that they have no plans in coming years to invest in the continent.  Common concerns amongst these respondents focused on the political, regulatory, and social environment, as well as infrastructure challenges and difficulty accessing customers.  These of course do remain valid concerns, however we believe that these barriers have steadily shifted downwards, and will continue to do so. 
Investors Plans in Africa
For example, we believe that urbanization is a natural catalyst for entry into new consumer markets (read more here).   As the population of Africa’s cities swells, they become increasingly compelling markets for firms looking to establish a presence on the continent.  Infrastructure can be a concern (read here), however we have seen substantial progress made there as well, as well as opportunities for investment in further infrastructure development. 
Political challenges of course remain.   It is often easier to discuss Africa as a compelling investment broadly.  However, the true opportunity lies in understanding the diversity of Africa’s myriad nations and capital markets, and actively seeking compelling investments within them.  In Africa’s 53 nations and 24 capital markets there are a spectrum of opportunities and challenges to understand and manage.  However, the perception of Africa broadly having an ‘unstable political environment’ unfairly lumps the good with the bad.  This of course presents an opportunity for Nile, as we focus on investing in select countries where we see the best risk/reward ratios.  It is also an attitude that many not necessarily persist.  As the opportunity for investing in Africa’s various nations becomes more fully understood, we expect the proportion of firms who invest in the continent to continue to rise.  
For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com.

We know Africa - from Cairo to Capetown.