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Investing in Africa in 2013

The global search for yield will continue to see investors viewing Africa with interest this year, despite corporate governance and other concerns about the continent.  To the end of November last year, the FTSE/JSE All Africa (ex-South Africa) 30 index, which tracks the top 30 stocks on the continent, returned a remarkable 33.96% in US dollars, which amounts to 41.45% in Rand terms.  Looking at individual bourses, Rwanda stands out with a return of 56.05%, followed by Uganda at 37.30% and Kenya, which rewarded investors with 33.78%.

These returns notwithstanding, investing in Africa should be approached as a long-term strategy, and this won’t change in 2013, says Petri Greeff, head of liability driven investment services at RisCura, a global investment consultant and financial analytics provider.  “Together, the lack of liquidity and the volatility of African markets, many of which are classed as ‘frontier’, dictate an investment horizon of at least 5 years,” Greeff says.

Their volatility is demonstrated by the fact that last year’s strong returns were preceded by a year of negative returns in 2011, when the index returned a dissatisfying -28.15% in US dollars. While this is disappointing, when converted into Rands this amounts to -12.29%.

Greeff says pension funds are viewing African investments as a diversification strategy, as Africa (ex-SA) returns show a low correlation to other markets, including South Africa.  “When it comes to a choice between African markets and emerging markets, we would choose Africa, as it is less correlated to South Africa, itself an emerging market.”

With Regulation 28 now giving pension funds leeway to invest up to 25% outside the Republic, and an additional 5% in Africa, Funds could essentially invest up to 30% in Africa. RisCura is advising its clients to at least consider an investment into Africa (if they havent already), to the tune of about 5% depending on the governing investment strategy of the Fund, even if they aren’t investing the remaining 25% in other markets.

It’s no secret that Africa is where the growth will be for the foreseeable future.  GDP rates of anywhere between 7% and 10% depending on the country, compare extremely favourably to the 2% expected for the Eurozone and the USA, and around 3% for South Africa.  Further, African equities are a lot cheaper, with PEs averaging around 7.  

“Africa’s potential is enormous.  The continent is where China was 30 years ago, and India was 20 years ago, with a similar population to both those countries, but with vast amounts of undeveloped land, not to mention Africa’s rich resources.”

Beyond commodities and agriculture, Greeff says a growing consumer theme has emerged on the continent.  As a result, sectors such as telecommunications, retail and, of course, banking, will all benefit. 

However, many investors wanting exposure to the continent will continue to seek it through the Johannesburg Stock Exchange, says Greeff.  They know that companies such as Shoprite, MTN and Mr Price, to name only a few, have rapidly growing footprints outside of SA’s borders, and the Rand is more liquid than other African currencies.

“But when you compare the price of the South African market to the low PEs of most African markets, it’s definitely worth investing some percentage of your portfolio in Africa ex-SA, even though it comes with political and geographical risk, and potentially high levels of volatility.”