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

No comments:

Post a Comment