Our Approach to Investing in Africa: Three Key Themes for Long Term Growth

Nile Capital Management’s investment team is dedicated to identifying and investing in compelling opportunities across the continent of Africa, and seeks to help investors share in Africa’s growth.  At NCM, we believe an active strategy will be the key element of success for anyone who hopes to gain exposure to Africa’s markets, and are confident about the value of our team’s expertise and selection process.  At our core, we are value investors who seek stocks where we feel the price is right.  However, we believe that Africa is an investment which requires a long-term horizon, and an understanding of the dynamics underpinning the continent’s growth.

When identifying opportunities for investment across the continent of Africa, Nile Capital Management’s strategy has three key investment themes.  These themes represent a broad set of opportunities for investors who seek a diverse exposure to Africa’s many markets and prospects for investment.  They are: natural resources, infrastructure development, and consumer growth.  Below we explain why we find these themes particularly compelling for many investors.

Natural Resources

To many investors, the natural resource endowments of many of Africa’s nations are the most obvious opportunity.  Africa holds a significant proportion of the world’s mineral reserves, including gold, and has significant reserves of oil and gas, and already plays a substantial role in the supply of many of the world’s key natural resources. As demand for natural resources continues to rise from the world’s emerging markets the world will increasingly turn to Africa – especially for energy and strategic and industrial metals. In fact, the U.S. National Intelligence Council estimates that 25% of the U.S. oil imports will come from Africa by 2015, and demand from China, Brazil, and other key emerging markets has and will continue to drive exploration and extraction across the continent.

In the coming years, Africa will continue to supply the rest of the world with a broad range of resources, from iron ore to oil. That quality is more important now than ever because the global supply of natural resources from current sources is becoming more limited. As emerging markets such as India and China continue to grow and mature, they will require the natural resources that fuel economic growth. As a result, African countries will continue to receive foreign direct investment for their resource endowments, which will be used to develop their economies.

Additionally, according to projections by the United Nations, in order to feed the world’s growing population global food production may need to rise by 70% over the next 40 years. Africa has almost 1.5 million acres of potentially suitable arable land that is not currently under cultivation, representing about 60% of the world available cropland.  As the globe’s population continues to rise, Africa will play an increasingly important role as a bread basket for the rest of the world.

Infrastructure Development

It is clear that investment in infrastructure is sorely needed on the African continent, and development of infrastructure networks in Africa is perceived as both a challenge and an opportunity. However, in stark contrast with previous decades, a significant (and rapidly increasing) amount of capital is being put towards solving Africa’s infrastructure challenges.  For Nile Capital’s team, the opportunity for investing in infrastructure falls into two main segments: physical infrastructure, and digital infrastructure.

On the physical side, access to affordable and effective housing, water and sanitation, energy, and transportation remains a challenge in many parts of Africa. Also, the ability for countries to capitalize on natural resources and manufacturing is hampered by poor infrastructure networks.  However, countries across Africa understand these challenges, and are actively investing in their solutions.  At the same time, companies that are involved in the development and maintenance of these networks stand to benefit from substantial investment in infrastructure.  In fact, McKinsey predicts that between 2008 and 2020, revenue for infrastructure companies in Africa will grow by an annualized 9%, reaching over $200 billion by 2020, from approximately $72 billion.

In addition to physical infrastructure, the development of digital infrastructure networks has and will continue to have a profound impact on the continent.  In fact, in many countries the challenge and prohibitive cost of maintaining a land-line network had for many years made it impossible for Africans to remain connected.  However, the introduction of cellular phone networks has caused a substantial shift in the landscape on the continent.  Whereas at the turn of the century cell phones were still relatively uncommon, market penetration over the past ten years has been profound.  In fact, Africa’s cell phone market has grown by more than 20% annually over the past five years, bringing the total number of subscribers from 283 million only five years ago to above 649 million through the end of 2011.  This number is expected to rise to 735 million by the end of 2012.

A significant opportunity for further penetration in the cellular space does however remain.  While access has continued to improve, 36% of individuals in Africa’s 25 largest markets remain without access to cellular phones.  In addition, 96% of phones are currently pre-paid, and data technology has only just begun to make inroads in the market.  Future developments of better cellular and internet connectivity thus will continue improving access to these technologies, and present remarkable opportunities for investment.

Consumer Growth

Finally, there are also compelling opportunities across Africa for consumer goods companies, especially given limited growth prospects in much of the developed world. The opportunity for investment in consumer growth across Africa is underpinned by two trends: a growing population, and an emerging middle class.

Presently, there are over one billion people living on the continent of Africa.  While it may be true that parts of Africa remain challenged financially, according to the McKinsey Global Institute, Africa as a whole had a combined spending power of $860 billion in 2008. This number, which has been growing robustly for years, is expected to rise to $1.4 trillion by 2020, as population and economic dynamics make it possible for more Africans to increase their consumption of basic and discretionary goods and services.

On a sheer population basis, Africa’s consumption should be expected to grow as the population rises.  According to the World Population Reference Bureau, Africa’s rate of natural increase in population is estimated to be 2.4% - meaning that by mid 2025 there will be an estimated 1.4 billion people living on the continent, and 2.1 billion by mid 2050.  In fact, according to McKinsey, Africa’s workforce will be the largest in the world by 2040 – surpassing even India and China.  Thus, should the level of consumption not change on a per capita basis we should still expect the continent’s spending power to expand as the population grows.

At the same time, not only is Africa’s population rising: so is the size (and spending ability) of its middle class.  For example, McKinsey notes that in 2000 there were approximately 59 million households in Africa with discretionary income. By 2008 that number had jumped to 85 million, and by 2020 it is forecast to rise to 128 million – more than double in merely two decades.  As the number of households with discretionary spending rises, the opportunity for consumer goods companies to sell more and better products rises as well.  At Nile, we understand the opportunity for growth in companies that effectively produce goods that suit African consumers’ needs. We see enormous opportunities in retail, food, housing, cellular phones, and financial firms that are well positioned to access the growing consumer market. We also believe that African companies are often uniquely positioned in the market, as they are able to bring local knowledge and branding power to their business model.

Even more surprising is the opportunity for penetration of new markets. Since the year 2000, McKinsey notes that 316 million new phone subscribers have signed up in Africa. However, they also note that in 2008 only 39% of Africa’s population had access to telecom services, 38% had access to modern retail, and 20% had access to banking (note that these statistics include South Africa, where the numbers are 92%, 68%, and 60% respectively, skewing the average up). It is amazing to think of the potential for growth in companies that are able to fill those gaps.

Going forward, we expect each of these themes to represent an excellent opportunity for investors who are seeking great value and long term growth.  We believe strongly that these three themes are driving Africa’s shifting economic landscape, and will strive to help investors participate in the Continent’s growth.

For more information, including a PDF version of the above, please contact Nile Capital Management at 646-367-2820 or info@nilecapital.com

 

The Economist Cover Features Rising Africa

Recently, the Economist's cover featured a story called Africa Rising, which discussed many of the positive trends that Nile Capital Management believes make Africa a compelling long-term investment opportunity.  We would encourage you to read here for the Economist's viewpiont.

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

Caution Over Europe Means Opportunity for Investing in Africa

Recently, global markets have been concerned over a Eurozone recession, and the health of the world’s Developed economies.  In particular, worries over debt levels in the European Union have led many investors to fear for the health of the monetary union and become wary about global growth.

Given concerns over slow economic growth rates in the US and Euro Zone as well as high leverage in these regions, we believe that investors are seeking to diversify their holdings into an increasingly globalized allocation.  In particular, many clients are looking for greater exposure to the expected centers of global growth in coming years, which means allocating more capital to emerging economies.  We believe it is important from a diversification standpoint to look beyond some of the most high profile emerging economies in order to truly participate in the broader sources of the world’s economic growth.

To that end, we believe that Africa's potential for strong, long term growth (both in terms of economic expansion, as well as increasing consumption) and low correlation to other global markets makes it a compelling investment allocation in a global portfolio.  In fact, the economic growth rates of many of Africa's nations are expected to be some of the highest in the world in coming years.  Trends such as demand for natural resources, infrastructure development, and an expanding consumer market are all likely to support Africa’s economic growth for years to come.  At the same time, Africa's twenty-four capital markets have generally demonstrated not only a low correlation of returns with other global exchanges, but also a low correlation between one another.  This means that adding Africa to a global portfolio has the potential to provide your clients with exposure to strong, low-correlated growth in the coming years.

We believe utilizing Nile’s Africa fund vehicle as part of a global portfolio is an excellent way to capture the opportunity which Africa presents.  Nile’s active strategy, which is is underpinned by our Portfolio Manager’s twenty years of experience and familiarity with investing in Africa, should provide us access to compelling opportunities across the Continent.  Nile’s expertise may prove to be an essential aspect to allow you and your clients to successfully navigate Africa’s capital markets.  Nile’s Portfolio Manager travels to Africa frequently to conduct research, and we maintain contact with a network of on the ground analysts who provide research and information about securities in which we may consider an investment.  In addition, we are a US registered investment adviser headquartered in New York City and believe that transparency is key in the current investment environment.

One key reason why Africa continues to be an excellent opportunity for investment is its low correlation to other global exchanges.  In fact, over the past few years the correlation has been low enough to compare to US stocks and US bonds.  Although in periods like we are currently experiencing, correlations across global markets tend to converge as investors pare risk globally in response to concern over weakness in the developed world.  Recently, Fidelity published an article which noted precisely how low this correlation had been over the past few years and demonstrates the opportunity for diversifying a portfolio through an investment in Africa. 

(The original draft of the Fidelity article can be found here: https://guidance.fidelity.com/viewpoints/africa-next-growth-story) 

However, although Africa’s exchanges may have seen weakness in recent months, we continue to feel that the Continent maintains a significant deal of independence from global business cycles.  For example, consumption patterns in Africa have continued to trend upwards, with expansion of the number of middle-income consumers continuing to drive growth.  While markets may in fact have fallen as a result of reduction of risk, this does not mean that the fundamentals of the companies that trade there are correlated to changes in global stock markets.  We believe the current weakness in global markets as an important opportunity to allocate funds to Africa, and the valuations of the firms in which we invest, which were already compelling, have become even better in our view.  

In addition, a good deal of the appeal of investing in Africa comes down to the potential which it provides for investors to diversify their allocations, and decrease the overall volatility of their portfolio.  If an investor chooses to put money in Africa, and Africa continues to demonstrate low correlation, this means that the overall volatility of the investor’s portfolio could actually go down, even while funds are allocated to a place which is traditionally considered more ‘frontier.’  In fact, we have actually found that adding an allocation to Africa in a portfolio comprised exclusively of the S&P 500 has led to an overall decrease in risk over time.  

Source: Bloomberg; African Data Includes South Africa, Nigeria, Kenya, Mauritius, Ghana, Egypt, Morocco, Botswana, through 12/2009.

Finally, we believe that concerns over currency fluctuations have weighed heavily in the minds of some investors in recent months.  We believe that the recent weakness in emerging market currencies has been driven by investors’ desire to decrease exposure to risk in the face of uncertainty over the situation in the Euro Zone.  Outflows from these currencies has driven many of them lower in the past few weeks, however we believe that over time the situation will re-adjust.  Over the longer term, we still believe that there is a trend towards appreciation of emerging market currencies against the US dollar.  In fact, we would argue that capital inflows and strong growth are an inevitable long-term result of Africa’s emerging consumer base.

Thus, we believe that now is an excellent time to consider capitalizing on global market weakness to invest in a region which will provide low correlation, strong economic growth, and a strong recovery.  

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

Mobile Technology in Africa Continues to Make Rapid Inroads

In our discussion of investment opportunities in Africa, we at Nile Capital focus on three key themes around which we seek to invest.  One of these themes is the growth in infrastructure networks.  While this means that we seek opportunities in Africa’s growing physical infrastructure, this focus also extends to Africa’s growing digital infrastructure and mobile technology sector.  A recent article in the Wall Street Journal Technology blog helps explain why.  

As we have written in the past, the opportunity to invest in Africa’s growing consumption power is substantial.  Already Africa is a continent which contains over one billion people: put differently, about one out of every seven human beings currently lives in Africa.  Based on population growth rates, the continent’s population is expected to grow to over two billion by 2040, at which time approximately one in every four people on the globe will be African.  

In addition, Africa’s telecommunications land line network remains woefully inadequate.  In many countries where populations climb into the millions, the number of land line phones barely breaks five figures.  The challenge and prohibitive cost of maintaining a land-line network had for many years made it impossible for Africans to remain connected.

However, the introduction of cellular phone networks has caused a substantial shift in the landscape on the continent.  Whereas at the turn of the century cell phones were still relatively uncommon, market penetration over the past ten years has been profoundly rapid.  As we previously wrote:

Since the year 2000, McKinsey notes that 316 million new phone subscribers have signed up in Africa. However, they also note that in 2008 only 39% of Africa’s population had access to telecom services , 38% had access to modern retail, and 20% had access to banking (note that these statistics include South Africa, where the numbers are 92%, 68%, and 60% respectively, skewing the average up). It is amazing to think of the potential for growth in companies that are able to fill those gaps.

According to the Wall Street Journal’s Tech blog, cellular penetration across Africa has not only remained strong in the subsequent years, but it has actually overtaken Latin America as the world’s second largest cellular phone network, behind only the Asia-Pacific region.  According to the GSM Association (the global mobile phone operator’s body), Africa’s cell phone market has grown by more than 20% annually over the past five years, bringing the total number of subscribers above 649 million through the fourth quarter of 2011.  From 2007 through 2011, the number of cellular connections has more than doubled, rising from 283 million only five years ago.  In addition, the Association noted that it expects this number to rise to 735 million by the end of 2012.   

However, there remains a significant opportunity for further penetration in the cellular space.  While access has continued to improve, the Association also noted that 36% of individuals in Africa’s 25 largest markets remain without access to cellular phones.  In addition, 96% of phones are currently pre-paid, and data technology has only just begun to make inroads in the market.

Nile Capital, believes that there are a number of opportunities to participate in Africa’s growing mobile sector.   While this may mean participating in the growth of some of Africa’s largest telecommunications firms, it also means understanding how cell phones can change the landscape of communication.  For example, mobile banking is now making it possible for Africans who reside far from local branches to send and receive funds electronically, which helps to drive growth in retail bank deposits.  

While cellular communication in Africa becomes more prevalent and services improve, we seek to identify trends and opportunities to help our clients share in the growth.

To read the full report by the GSM Association, please visit here.

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.

Market Watch: Africa “The Most Fascinating Region in the World Right Now”

In an article published yesterday on Market Watch, the opportunity for investing in Africa has again been highlighted, with the author noting that Africa may be the ‘final frontier.’  While the article notes that investors’ perceptions of Africa are still 'rooted in the past,' it also points out that many of Africa’s perceived challenges are similar to Europe during the Industrial Revolution, or even Asia in the not so distant past. 

The article justifiably points out that there are yet a number of hurdles to be overcome as Africa continues to grow.   However, while it points out that political challenges remain, and infrastructure networks are often insufficient, it also notes that a number of countries are in a 'virtuous cycle,' in which faster growth of tax revenue facilitates higher infrastructure spending, which encourages faster growth.  As many of Africa’s economies are expected to grow by 7% or more in the coming years, this cycle is expected to perpetuate itself in many of Africa’s nations.

Overall, the article points out that an emerging Africa has two significant implications for the global economy: first, it could precipitate a turnaround in the bearish sentiment around the global economy.  Many investors are presently focused on concern over the Euro, and seeking the next growth story for investment.  Perhaps, the article suggests, that Africa is it.  In addition, the article notes that Africa could be the last real emerging market story.  Globally, nowhere is as underdeveloped as Africa, and should the continent continue to grow as it has been in recent years, it is only a matter of time before it could experience ‘explosive’ growth.   We could not agree more.

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.

De Beers Moves Sorting and Sales of Diamonds to Botswana

An article in the Wall Street Journal caught our eye over the weekend, as it focused on a trend we have been noticing with increasing regularity across Africa.  The article, “De Beers to Deal in Botswana” (link) highlights the recent move by diamond powerhouse De Beers to move its rough diamond sales and sorting activity from its current location in London to the capital of Botswana by the end of 2013.  This move demonstrates a trend we highlighted in an earlier article (found here) about the potential for Africa’s industries to move up the production value chain, thereby creating more and better jobs in value-add industries.   

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820

We know Africa - from Cairo to Capetown.

Fidelity Investments Agrees: Africa Could be the Next Big Growth Story

In a recent article (found here) the Fidelity Viewpoints series provides a rationale for investors to consider Africa in their portfolio allocations. As noted in the article, there are a number of sectors in Africa that look compelling from both a growth and a diversification perspective. In addition, the article points out that the secular and economic trends in Africa should merit investors’ further consideration.

Although the opportunity for investing in Africa is becoming more widely understood, it is still relatively difficult to find a pure-play investment opportunity in the Continent. In fact, while a handful of funds many have exposure to Africa, we at Nile Capital Management believe that offering an actively managed, pan-Africa mutual fund makes us unique. As you can see in our most recent Fund Fact sheet Nile Capital is invested across Africa, and seeks opportunities throughout the Continent. This is in contrast to other funds where an allocation to African countries outside of South Africa, and at times Egypt, is still relatively rare. In reality, while Fidelity’s manager may speak favorably of the opportunities in Africa’s frontier, less than half of their fund’s exposure is in Africa, with the substantial majority of that Africa exposure allocated exclusively within South Africa.

Nile Capital is truly pan-African, investing in what we see as many of the greater opportunities in Africa’s frontier markets. We seek to invest in opportunities which capture the growth of the consumer class, the demand for infrastructure, and global interest in natural resources. We believe that Nile’s fund vehicle is well positioned to truly participate broadly in Africa's growth. Nile Capital Management’s expertise and focus on the African continent provides investors access to the Continent's potential for growth.

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.