Africa is a place that generally strikes a combination of fear and excitement into people and when it comes to investing, this is no exception.
On the surface, you find an asset class that is poorly understood and under owned but dig a little deeper and you find very cheap and diverse opportunities supported by unbeatable demographics.
Africa comprises of 20 per cent of the world’s land mass, 60 per cent of the world’s arable land and is abundant in natural resources including oil and gas, platinum, gold and diamonds. Its population is set to double from 1.2 billion people today to 2.4 billion by 2050 and 60 per cent of this population will be living in the ever expanding cities (40 per cent at the moment). Half of Africa’s population is under 20 years old and Africa is set to have the world’s largest working population by 2035.
African countries are also very successfully connecting their residents through use of mobile, skipping the massive investment need for fixed line infrastructure. This is particularly key in connecting rural dwellers to payment, communication, banking and information services. For example, Ethiopia set up a hotline allowing small farmers access to advice from ‘Agronomists’ (farming experts) which received three million calls in its first six months.
Given the demographics, it comes as little surprise that, according to the IMF, 11 of the fastest 20 growing economies until 2021 will be in Africa. As GDP grows, Africa is starting to enjoy rising incomes, in return driving growth for branded goods, mobile phones, internet services and western style shopping, particularly in the young emerging class of urban professionals. This offers investment opportunity.
There’s an old African proverb: ‘Don’t test the depth of the river with both feet,’ and I think this rings very true with African investment. I have covered all the ‘pros’ without touching on the ‘cons’ such as terrorism, crime, corruption, poor corporate governance and illiquid investment. It is very important to take great care with stock selection and not just ‘jump in’.
My preferred strategy is to invest in liquid South African based companies with excellent environmental, social and corporate governance. They bene t from the relative stability of being based in South Africa, and liquidity of the Johannesburg Stock Exchange, but can use their heritage and African presence to expand throughout other African countries.
An example is Vodacom, 65 per cent owned by Vodafone, which is where it inherits its corporate governance. It is expanding its mobile network throughout Sub-Saharan Africa, where it is the number one operator in each of its markets. Its dividend yield is a healthy 5.5 per cent. Should it maintain its market share and continue to grow as Africa grows, we can expect this yield to grow sustainably in the coming years. It is important to remember that foreign dividends will fluctuate with currency movements, however.
A further example is Woolworths, the Southern Hemisphere brother of Marks and Spencer. They maintain close ties and it is surprising when you walk into one of the stores how similar they are. They are expanding slowly through Africa, catering for the needs of the emerging middle class, with very little competition. Most of Africa isn’t quite ready for an M&S type store but if the demographics are anything to go by, demand is set to increase significantly in the coming years, so Woolworths should gain significantly.
Risk warnings: The information contained in this document is provided for information purposes only and does not constitute a research recommendation or investment advice and must not be treated as a recommendation or an offer or solicitation for investment. Investors should form their own view in relation to the above mentioned investment. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.