The Case For Africa: Still Strong, Amid Global Challenges

Equity markets around the globe have been challenged this month, with concern over the United States’ spending policies driving headlines, and worries over European debt markets sending markets lower worldwide.  Notably, markets were shaken by continued trouble in Europe, as bad debts in the ‘PIGS’ (Portugal, Ireland, Greece, and Spain) are pointing to the necessity of future actions to stabilize the European monetary union.  Africa’s markets have reacted negatively in tandem with a global fall in equities, as rising fear has led to a broad flight to safety worldwide. 

In the short term, we believe that the situation in the Euro zone will need to be resolved in order to restore confidence to global markets.  We expect that the Euro zone will take further steps towards this end in the very near term, and believe that concern will be mitigated by the end of 2011.  This resolution could come in the form of a tight integration of fiscal and monetary initiatives among the EU; a breakup of the Euro, an increase in size in both the European Central Bank and European Financial Support Facility liquidity and guarantee programs; a restructuring of the debt of Greece, Italy, and Spain; or by any combination of the above.  In most cases, the short term growth outlook for the EU region is poor.

On the other hand, a leveling off of commodity prices from a growth slowdown in Developed Markets will improve real consumer spending power, supporting consumption in most economies, especially within Emerging Markets.  In fact, for a number of months we have believed that commodities were likely to be challenged in the short term as concerns over global growth rose.  Notably, concern over inflationary pressure stemming from high oil and food prices has been suppressing returns in Emerging Markets year to date, as consumers have been forced to use more of their income to purchase basic commodities.  Should that change, we would expect to see Emerging Market consumers increase their spending, which would be a positive sign for these markets.  In addition, we have already seen Emerging Markets across the globe – including many of Africa’s nations - raise interest rates in order to curb inflationary pressure.  However, we believe that the cycle of monetary tightening is coming to an end in the Emerging world, and that consumer spending will drive returns in the short term.  To that end, we believe the opportunity for investing in consumer goods, which we feel will prove protective during increased market volatility, has become more compelling.

In the longer term, we continue to believe that growth in Developed Markets will remain anemic over the coming years, as high debt levels, unemployment, and entitlement spending will make it difficult for sustained growth to occur.  On the other hand, Emerging Markets – most notably Africa – have demonstrated strong growth over the past few years, and are expected to continue their expansion over the coming decade.  Thus, investors who are seeking opportunities for growth should continue to seriously consider allocating capital to the continent of Africa.  We continue to see Africa as the best exposure to have among various investment options due to slowing growth in the US and other Developed Markets.  We also view Africa as favorable relative to other EM economies that may be overly dependent on US or EU growth.  We see the growth story in Africa as a secular trend, supported by increasing urbanization, rising real incomes, improved economic policies, and long needed large infrastructure investments.  We believe that once these changes have been kicked off, the process will continue to build on itself to create long term growth.  Although in the short term Africa’s markets have been challenged along with the rest of the globe, the long term investment opportunity makes this a compelling time to buy.

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.

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

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:

industry/automotive/energy

services, consumer products

raw materials

real estate/construction

hi-tech/telecom

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.

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).

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. 

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.

BRIC Becomes BRICS – South Africa as a Gateway to the Continent

Recently, South Africa has been in the news for its invitation to the third summit meeting of the BRIC club – a group named after its members’ initials (Brazil, Russia, India, China) which for many investors has represented the most compelling opportunities in Emerging markets over the past decade. The invitation of South Africa changes this group to the BRICS, and represents a diplomatic victory for President Jacob Zuma.

However, the invitation left some scratching their heads, as South Africa’s relative size and growth makes it a less significant player in the global market than its larger companions. South Africa’s population is estimated to be around 50 million residents – a substantial number, but only enough to make it the 25th largest country by population. In comparison, Russia has 139 million residents, Brazil has 203 million, India has 1.2 billion, and China has 1.3 billion – all substantially more than South Africa alone. The economies of the original BRIC countries are also substantially larger – Brazil and Russia’s GDPs exceed $2 trillion, India’s exceeds $4 trillion, and China’s is approaching $10 trillion. South Africa’s economy is comparably small at just over $500 billion, and is expected to grow at a relatively modest rate in coming years.

Given all this, including South Africa as a ‘BRIC’ economy on its own may seem counterintuitive, especially when countries like Mexico, Turkey, or even Indonesia are larger on a population and GDP basis. However, we believe South Africa’s inclusion makes absolute sense, as South Africa is an excellent gateway for investment across Africa as a whole.

Many investors agree that the opportunity for investment in various sectors and economies across the continent is substantial. However, we often hear that barriers to entry for businesses in Africa are typically high. At times, companies that see opportunity in Africa face legal and logistical challenges in establishing and maintaining operations as well as building markets for their products in Africa’s various (and varied) economies. In order to combat this challenge, many companies are choosing to work through South Africa in establishing a presence on the continent.

Take for example the recent purchase of Massmart by Wal Mart. Wal Mart has chosen to establish a presence in Africa via an existing firm in order to take advantage of its experience in the South African market. However, from an investor’s perspective the opportunity for Wal Mart is not limited to South Africa. Rather, Massmart is a compelling acquisition because it is well positioned to expand into the remainder of the continent. As we have previously written, the opportunity for retailers to tap into Africa’s growing consumer class is substantial, and firms that are able to be at the forefront of the trend could see substantial rewards. Many South African firms are thus positioning themselves as market leaders in telecommunications, banking, retail, and other industries where growth is expected to be strong.

In addition, South Africa is often used as a base for natural resource firms which operate in other parts of the continent. South Africa’s regulatory environment is well developed and transparent, and often serves as a good base of operations. In fact, recent tax law changes in South Africa have demonstrated the country’s desire to be a gateway to the rest of Africa. In many ways South Africa’s regulatory environment is more similar to that of the developed world than its fellow BRIC economies. As a recent Ernst & Young study indicates, many investors’ perception of the various large economies in Africa strongly favors South Africa for its attractiveness - 59% of the survey’s respondents see South Africa as the ‘most attractive’ country for investment in the continent.

In addition, it should not be overlooked that the invitation for South Africa was a strategic decision by the other BRIC members. As trade between emerging markets (the so called south-south link) increases, the original BRIC members want to be perceived as open and welcome to South Africa, and the rest of the continent. Because South Africa is currently Africa’s largest market, it is often involved in the preponderance of these south-south flows. Thus, including South Africa in the BRIC club is a sign that the other members want to do business with the continent.

Therefore, while South Africa viewed independently may not seem like an opportunity which is comparable to the other BRIC economies, Africa as a whole is an opportunity on the same scale as India or China. It’s inclusion in the BRIC club is thus a harbinger of Africa’s growing role in the Emerging Markets, and its importance for Emerging Market investors.

Investment News Highlights Africa’s Remarkable Returns and Low Volatility

A pair of recent articles in Investment News’ magazine have again highlighted the opportunity in Africa for investors seeking strong returns with low volatility. In the first, found here (free subscription required to view) the author notes that investors might be surprised by the “remarkable returns” and “low volatility” that Africa has seen over the past decade, and points out that:

“Over the 10-year period through December, the Africa Composite Index produced an average annual return of 17.3%, with volatility as measured by standard deviation of 11.9%.

By comparison, the MSCI Emerging Markets Index over the same period had an annualized return of 13.2% with a standard deviation of 24.7%.

The S&P 500 over the same period had a negative annualized return of 0.5%, with a standard deviation of 16.4%.”

The article also highlights opportunities in commodities, noting that “the continent contains 13% of the world’s oil reserves, 50% of proven gold reserves, 50% of iron ore reserves, 60% of cobalt, and 90% of platinum group reserves.” Consumer growth and infrastructure are also mentioned as strong investment opportunities.

The second article (found here) notes that “although all the usual preconditions and warning related to risk apply here, there is no denying the market’s allure” It also points out that:

“Some market analysts already have started lumping Africa in with the emerging BRIC economies of Brazil, Russia, India, and China. In fact, Goldman Sachs Asset Management chairman Jim O’Neil, who is credited with coining the BRIC term, is among those who think that African nations could surpass Brazil and Russia as the next hot emerging markets.”

In both articles the opportunity for investing in Africa is very favorably presented, with one even speculating that Africa could be the next Asia for investors.

In the view of Nile Capital Management, a key message in each of Investment News’ articles is what a surprise Africa may seem to be. At Nile Capital Management we have been analyzing Africa’s growth, and have been aware of the opportunity for investors for some time. However, much of the investment community is still learning about how compelling investment in Africa could be. This to us makes the opportunity for investing in Africa even stronger, as increasing awareness is likely to drive up valuations. This will be beneficial for investors who are involved on the continent already.

In fact, Investment News points out that:

“Part of the valuation appeal at the individual company level is due to the limited coverage of African stocks by Wall Street…Because Africa is so poorly covered in the media, most investors probably would be surprised to learn that there are more than 100 companies on the continent whose annual revenues exceed $1 billion. What’s more, Africa is home to nine of the world’s 15 fastest-growing countries.”

However, as investors come to understand the opportunity for investing in Africa, it will be important for them to select the most compelling stories across the continent. For example, although there are over 2,000 equities listed across Africa’s 24 public markets, Nile Capital seeks to invest in somewhere between thirty and forty of them at any time.

Nile Capital Management’s research team looks across the continent for investments which trade at a compelling values and have strong long-term growth prospects. This active selection process means we seek to invest in what we deem to be the ‘best’ opportunities on the continent. We therefore believe that the selection of what we see as the best opportunities in Africa will help investors share in Africa’s growth while managing risk.

As interest in investing in Africa continues to gain momentum, Nile hopes to remain poised to assist long term investors look for returns on the continent. Articles such as these simply help reinforce what we believe: there are substantial returns to be made in Africa, and we seek to participate in the opportunity.

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.

Africa Poised for ‘Explosive’ Frontier Market Growth: Consultant Advises 1-2% Overall Allocation

In an article found here Asset International magazine (a subsidiary of PlanSponsor) notes that Africa “may provide some of the most robust investment opportunities for funds.” The article notes that investment plan consultants have been strong supporters of investment opportunities in the continent, and quotes prominent consultant Adam Tosh saying that “over the next five years, exposure to Africa should make up 1-2% of a total investment portfolio.” The author also highlights a previous article which recommended that “institutional investors look to smaller emerging markets to boost returns.” The earlier article pointed to research begun in January 1997 which found that that a basket of non-BRIC emerging markets had outperformed the BRICs by 39%. A similar story exists for Africa. As you can see here, a composite of some of Africa’s largest stock exchanges has significantly outperformed other emerging markets over the past decade, while a providing a lower standard deviation of returns. Thus, the opportunity for investment in emerging markets beyond the BRICs – notably Africa - is compelling both on a pure return basis, as well as from the standpoint of added diversification. 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.

Financial Times: Africa Ripe for Reappraisal

An article published yesterday in the Financial Times (available to subscribers here) has one again highlighted the opportunity for investing in Africa. The article notes that after rebounding from the financial crisis, “sub-Saharan Africa is increasingly viewed as an opportunity rather than a burden.” For example, the article quotes a bank executive attending the World Economic Forum in Cape Town, who noted that “whereas a decade ago such meetings focused on aid and AIDS, the conversation was now about investment and growth.” The article highlights the importance of natural resources for Africa’s growth, as well as interest from other emerging nations: “Growth has been spurred by market liberalisastion and improved public management of finances as well as a boom in the commodities that Africa has in abundance. Perhaps the biggest factor has been the engagement of emerging powers including India and Brazil but led by China. Asian demand for African resources has engendered a revival in the terms on which the continent trades.”

However, the article points out that natural resources are only a part of the story for investors who see opportunity in Africa, noting: “The story is no longer just about resources. The commodity price surge has coincided with the rapid expansion of banking, telecommunications and other services formerly weighed down by the dead hand of the state. This and the sluggish pace of recovery in the developed world have encouraged investors from elsewhere, including Europe and the US, to look at Africa with different eyes.” In addition, the article highlights the consumer growth story (which we have discussed previously here and here, noting that: “Consumer spending is also rising at more than twice the rate of developed countries. The phenomenal growth in telecoms has pointed to a market that few consumer groups and service industries had thought about much before – and one that, if North Africa is included, now exceeds 1bn people.” In fact, the article cites a recent research report by management consultancy A. T. Kearney, which noted that executives at packaged goods companies should no longer be thinking about whether to enter the region, but where and how they should do so. For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 info@nilecapital.com. We know Africa - from Cairo to Capetown.

Nile Pan Africa Fund Assesses Its First Year Performance, Points to Low Correlation With Other Indices

For a full copy of our shareholder letter, please email us at info@nilecapital.com

In its letter to investors, Nile Capital Management (NASDAQ:NAFAX) advisor to the Nile Pan Africa Fund, believed to currently be the only actively managed mutual fund that focuses exclusively on the continent of Africa, provided a review of the Fund's first year of performance and portfolio characteristics. The firm also drew attention to the launch of its investment blog Money Watch Africa, which provides commentary and analysis of the investment landscape and opportunities in Africa.

"We are pleased to report that the Nile Pan Africa Fund not only outperformed the MSCI Frontier Markets Index during its first year of operation, but also showed low monthly correlation to the index and what we believe is an attractive risk profile. We believe these characteristics make the fund a compelling investment tool for investors who are looking for deeper diversification of their global portfolios," said Larry Seruma, the fund's manager and chief investment officer of Nile Capital Management.

From its inception on April 28th, 2010 through April 30th, 2011, the Fund gained 22.07% annualized. During the same time period, the MSCI Frontier Markets Index gained 9.94%, the Dow Jones Africa 50 Titans Index increased 11.07% and the S&P 500 Total Return Index advanced 16.67% annualized.

The Fund also showed low monthly correlation to the S&P 500 (0.72) as well as the MSCI Frontier Markets Index (0.48). The Fund's annualized standard deviation (based on monthly returns) was 16.77% -- lower than the S&P 500 (18.09%) and MSCI Frontier Markets (17.21%), indicating a favorable risk profile for the Fund.

Nile Capital believes that the fund's first year results bolster the case for investing in Africa and the firm's active management approach to investing in the continent based on fundamental research on the ground.

"While growth in developing nations is slowing down, Africa's growth is projected to be in excess of 5% through 2015, yet it continues to be an under-researched and under-invested region. We believe our on-the-ground research adds value by uncovering attractive investment opportunities, while managing the risks," added Seruma.

About Nile Capital Management, LLC

Nile Capital Management, the Advisor to the Nile Africa series of funds, is a New York-based asset management firm with in-depth investment expertise that covers the entire African continent, from Cairo to Cape Town. By focusing on Africa, the company seeks to identify and capitalize on the best investment opportunities in the continent and expand investors' access to emerging/frontier markets. Additional information is available at www.nilefunds.com.

Nile Pan Africa Fund (NAFAX) Performance, April 2011
As of April 30, 2011. Inception Date is April 28, 2010.

The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. As stated in the current prospectus, the Fund's total annual operating expense ratio (gross) is 4.17% for Class A shares. The Fund's investment adviser has contractually agreed to reduce its fees and/or absorb expenses of the fund, at least until July 31, 2011, to ensure that the Total Annual Fund Operating Expenses After Fee Waiver (exclusive of any acquired fund fees and expenses, borrowing costs, taxes and extraordinary expenses) will not exceed 2.50% for Class A subject to possible recoupment from the Fund in future years. Please review the Fund's prospectus for more detail on the expense waiver. Results shown reflect the waiver, without which the results could have been lower. A Fund's performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. For performance information current to the most recent month-end, please call toll-free 1-877-68-AFRICA.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Nile Pan Africa Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 1-877-68-AFRICA. The prospectus should be read carefully before investing. The Nile Pan Africa Fund is distributed by Northern Lights Distributors, LLC member FINRA. Nile Capital Management, LLC is not affiliated with Northern Lights Distributors, LLC.

Mutual Funds involve risk, including possible loss of principal. Because the Fund will invest the majority of its assets in African companies, it is highly dependent on the state of the African economy and the financial prospects of specific African companies. Certain African markets are in only the earliest stages of development and may experience political and economic instability, capital market restrictions, unstable governments, weaker economies and less developed legal systems with fewer security holder rights. Adverse changes in currency exchange rates may erode or reverse any potential gains from the Fund's investments. ETF's are subject to specific risks, depending on the nature of the underlying strategy of the fund. These risks could include liquidity risk, sector risk, as well as risks associated with fixed income securities, real estate investments, and commodities, to name a few. Non-diversification risk, as the Funds are more vulnerable to events affecting a single issuer. Investments in underlying funds that own small and mid-capitalization companies may be more vulnerable than larger, more established organizations.

Dow Jones Africa Titans 50 Index: Measures the stock performance of 50 leading companies that are headquartered or generate the majority of their revenues in Africa. Stocks are selected to the index by float-adjusted market capitalization, subject to screens for size and liquidity.

Standard Deviation: Measures the degree of variation of monthly returns around the mean (average) return. The higher the volatility of the investment returns, the higher the standard deviation will be.

Correlation: Measures how closely the investment tracks an index.

The S&P 500 Index: An unmanaged composite of 500 large capitalization companies. The index is widely used by professional investors as a performance benchmark for large-cap stocks.

The MSCI Frontier Markets Index: A market-capitalization weighted index of 26 emerging market country indices.

You cannot invest directly in an index.

Wall Street Journal Highlights Africa’s Growing Middle Class

An article in the Wall Street Journal yesterday (found here) highlighted the growth of Africa’s middle class, and notes that in terms of size, as a whole the middle class is on par with that of India and China.

The article notes:
Over the past decade, the number of middle-class consumers in Africa has expanded more than 60% to 313 million, according to a new report from the African Development Bank Group. The study—one of the first efforts to document the contours of Africa's emerging consumer class—brings into focus a potentially huge and enticing frontier market for global investors.
The article includes the below chart from the African Development Bank Group (ADBG), which shows growth in the middle class, and the share of each of Africa’s countries that considered a part of that class.

The ADBG notes that the middle class in Africa – those who make $2 to $20 per day - represents about 34% of the overall population, or about 313 million people. This compares with around 196 million middle class individuals a decade ago.

The article also makes an interesting note about how the researchers documented the emergence of the middle class. Statistics were gathered from car dealerships, airlines, mobile phone companies, and even private schools in order to estimate the size of the middle class. At Nile, we have someoneare on the ground in Africa on a regular basis looking at companies, sizing up trends, and seeking opportunities for investment. Unlike developed markets, this on the ground research is crucial in finding and understanding compelling investments, and we believe our experience gives us a competitive edge. Second, the researchers highlighted a key point about a growing consumer class – it comes in tandem with more discretionary purchases. As with any consumer, when someone in Africa finds him or herself with more income, he or she will choose to buy more (and better) goods. However, Africa is a highly segmented market, with notable differences in tastes and preferences across the continent, and even within individual countries. Thus, we constantly seek to understand where the new members of the middle class will choose to spend their funds – and invest in those opportunities.

In addition, the article notes that “the data paint a picture of a continent on the move, thanks to more open markets and a greater degree of political stability. New jobs—instrumental in China's and India's growth and urbanization—are spurring migration to cities and Africa's wealthier countries.” We have seen this as well, and would point out the recent McKinsey report which noted that 40% of Africa’s population lived in cities in 2010. In fact, in 2010 there were 52 cities in Africa with over one million residents – more than in North America and India, and the same as in Europe. These cities serve as natural entry points for firms seeking to expand their market share in the continent.

These observations are similar to what we have written about the African consumer market (see our article here) which we see as an incredible opportunity for long term investors.

Of course, it is also important to point out that although there are significant opportunities across Africa, they range widely across the continent. As shown in the graphic above, there are countries where over 2/3 of the population is middle class, and countries where less than 1/3 is. Thus it is important to view each of Africa’s nations as a distinct investment opportunity, some of which are more compelling than others. Being aware of the differences – and able to selectively invest across the continent – presents investors with a compelling opportunity.

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.

The Economist: Mixed Perception of Chinese Investors in Africa

In an article in the Economist over the weekend (read here), the magazine profiles the less-than-favorable perception among many Africans of China's investments in their economies. The magazine notes that “once feted as saviours in much of Africa, Chinese have come to be viewed with mixed feelings—especially in smaller countries where China’s weight is felt all the more. To blame, in part, are poor business practices imported alongside goods and services.” The article points out that construction projects which are completed by Chinese firms – often a ‘tied’ requirement for low cost Chinese loans – are frequently of low quality. Also, labor practices among Chinese firms are frequently perceived as corrupt or draconian. The article notes that the political backlash in many African nations has been significant, with many African leaders pushing for greater scrutiny and improvement of practices. However, it also quotes a former senior official at the African Development Bank who claims that “more Chinese have come to Africa in the past ten years than Europeans in the past 400.” We had noted previously that China was undoubtedly going to remain a major player in Africa, although we see other Emerging nations in particular as working to expand their role. However, as we mentioned in a recent article Africa’s governments are becoming more sophisticated in their ability to negotiate with foreign investors, with many recent contracts requiring infrastructure investments and local employment as a condition of new deals. Ironically, these infrastructure projects have been one reason for the recent influx of Chinese workers in the Continent, and have in some cases led to greater scrutiny of their business practices.

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.

Production in Africa: Moving Up the Value Chain

In our continued effort to distill what was discussed at the African Investment Conference put on by Institutional Investor Magazine, we wanted to highlight the emphasis which was placed on Africa’s potential for moving up the production value chain. In many cases, African economies can be (often falsely) perceived as dominated by natural resources or agricultural products alone. Although this perception is often overstated, it is true that commodities and agriculture remain the majority of Africa’s exports to the remainder of the world. However, there is enormous potential for investment in productivity and technology that could transform the composition of a number of African economies. To us, this process has already begun in many countries and sectors across the Continent, as savvier governments, growing economies, and more capital and expertise have made it possible for movement up the ‘value chain.’

Briefly, the ‘value chain’ is the idea of bringing raw or unfinished goods closer to a final, finished product. In each step of this process, the value of the good which is produced (and therefore the price for which it is sold) increases, often substantially. For example, in the production of a cotton shirt, a number of steps must be taken for raw cotton to be transformed into a finished product:

Raw Cotton -> Processed Cotton ->Thread -> Fabric -> Shirt

This (simplified) diagram demonstrates a basic value chain. In this example, raw cotton would be sold at a price which is significantly lower than processed cotton, et. cetera, with companies profiting at each step from the improvements they make. Thus, a company which processes cotton will buy raw material, and sell an improved good for a profit. Industries which are built on bringing goods up a step in this process often provide higher paying sustainable jobs, economic growth, and increased profit potential, as well as help diversify an economy away from basic materials into more ‘value add’ industries.

In terms of Africa, we see a great deal of potential for movement up the value chain. As we mentioned before, Africa is a major producer of a number of raw goods, which are often exported to other countries for improvement. This is problematic for a number of reasons: for example, the value which is added during the processing of a raw material is lost if the processing happens abroad, as are the highly skilled (and higher wage) jobs this processing requires.

Although each country is unique, Africa as a whole has been historically perceived as a poor place for investment in value added processes or vertical integration. In many cases, a history of corrupt governance, coupled with low levels of expertise and limited infrastructure have often made it difficult for business ventures to be successful, which has made investors wary of allocating capital to the region. In addition, domestic demand for many goods and services has historically been too low to justify the development or relocation of production facilities.

However, we believe that the historical view of many African nations’ potential for value addition should be revisited, as a number of catalysts have been developing which makes investment in these sectors more compelling. First and foremost, it is important to note that, in many cases, governance has improved substantially. Improvements in macroeconomic stability and the legal framework have often made the climate easier for businesses to be successful on the continent.

In addition, governments have become more sophisticated in negotiating deals with firms that are bidding for local contracts. In previous years, Africa’s natural resources were often extracted by foreign firms, which would remove raw goods from the continent and improve them elsewhere. However, in more recent years, governments have begun to require that extractive firms add infrastructure or value-add components to their bids for contracts. For example, as you can see in the chart below from McKinsey, from 1991-2000 only 1% of Africa’s largest resource deals had a component which included investment in infrastructure or industrialization. In contrast, that number grew to 9% between 2001 and 2005, and had risen to 23% in the period from 2006 until 2010.

In addition, as industrialization increases the availability of better jobs in Africa, it also signifies the expansion of the middle class, creating greater domestic demand. This cycle reinforces itself, and as the African consumer class grows (and urbanization facilitates entry points in the retail market), demand for domestic production will grow as well.

So again, we return to what this means for how Nile looks at investing in Africa. We believe that there are a number of opportunities for selective investors to capitalize on the growth these catalysts will create. First, and perhaps most direct, there are gains to be made by investing in companies who are on the forefront of this trend. For example, firms that are investing in goods and services which satisfy growing domestic demand could have substantial potential. We seek to identify industries and firms which are investing in sectors where growth will be strong. This could include firms which are producing goods for export, but we also see potential in companies which are looking to capitalize on Africa’s growing consumer class (read more here).

However, there are also a number of opportunities for less direct investments which could capitalize on this trend. We had previously written about investing in infrastructure firms (read here), which we see as one of the key opportunities in Africa at this point. A firm which is able to provide infrastructure needs such as power and transportation makes it easier for these ‘value add’ sectors to develop and grow. In addition, opportunity may be found in financial firms which provide capital for emerging firms and industries to grow. These financial institutions tend to have a good local knowledge base and may generate substantial profits in tandem with the companies they fund.

As Africa’s infrastructure improves and its demand for more and better consumer goods continues to grow, we continue to believe that the opportunity for investment in the Continent remains substantial, and we are actively seeking ways to invest in companies that are well positioned to take advantage of it.

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

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