Wealth manager Courtiers tests African investments, but does not jump in

Caroline Shaw, fund manager at wealth manager Courtiers has repeated an African proverb that ‘no one tests the depth of a river with both feet’ to explain its view of investing in the continent.

UK mobile phone signals are often patchy. I have to leave my house and stand on the pavement to make a phone call. I live in Henley-on-Thames, a reasonably sized town in Oxfordshire, not terribly far from the financial capital of the world. If I lived in a small town in Tanzania I would be unlikely to suffer such problems. A recent special report by The Economist noted that the mobile signal never faltered on a 600 mile journey by road across Tanzania. Every town had mobile broadband internet.

Africa is evolving, fast. Technology is helping. The World Bank estimates that mobile phones have added 1% a year to Kenyan GDP growth since 2000. There are three for every four people in Africa, the same as in India.

But are investors flocking to Africa? It is only 5 years since the much hyped New Star Heart of Africa fund closed. When investors wanted their money back it could not deliver. Stock market liquidity was lower than it had estimated. Not the greatest selling point. But Africa is back on the agenda, at least in the media, so we thought we would take another look.

The liquidity problems have not gone away. South African stock markets provide the majority of the liquidity and beyond Nigeria and Kenya there is a “liquidity cliff”. Several African funds therefore have very large weightings to South African listed equities. Such specific investment is not necessarily going to provide exposure to the global domination of Cote d’Ivoire in cocoa production or the emergence of domestic discretionary spending across the continent.

What’s happening on the African continent? Our research shows that the 55 countries are very diverse, in resources and people, and at varying levels of development. It is important to analyse the countries or sub-regions separately.

Basic needs are not always being met. Life expectancy is low. A woman in Lesotho can only expect to live to age 46. Globally, only Afghanistan fares worse and all other countries in the bottom 20 are African. Healthcare spend varies widely. In Tanzania you share a doctor with 145,000 other people. Better to be in Zambia where you only share with 19,000 others. Primary education is inconsistent. Only a quarter of people in Mali are literate and it rises to only 60% of people in Nigeria.

Some African countries are rich in raw materials and agricultural commodities. Many of us buy vegetables that have been grown in Egypt and our cocoa is usually from Cote d’Ivoire, Ghana, Nigeria or Cameroon. We have probably drunk Ethiopian coffee and Kenyan tea. Our jewellery likely originated in a South African mine, more than 3,500 metres below the ground. But commodity revenue does not always filter down to the poor, and corruption persists.

Rwanda and Liberia came top in our annual analysis of emerging markets with the most potential for GDP growth. In fact, African nations comprised half of the top ten. Potential indeed, but from a low base and with small populations. Liberia has only 4 million people and, whilst it has huge potential to improve its GDP per head from current levels of just over $700, it has a long way to go to even catch Rwanda ($1,500 per head) let alone the more “emerged” countries such as India ($4,000 per head) and Brazil ($12,000 per head). For comparison, UK and US GDP per head is $37,500 and $51,200 respectively. It is not easy with a very small population so potential may well go unfulfilled.

There are positives, of course. Trading with China, Africa’s biggest trading partner, has increased 15 fold in a decade. Infrastructure is improving with foreign investment helping – the Chinese are building an urban rail network in Nigeria’s capital, Lagos. Violence is broadly in decline, even though it does not always seem that way.

Demographics provide the biggest opportunity. There are 10 million new entrants to the labour force each ear. There are 200 million young people between ages 15 and 24. This “youth bulge” provides both an opportunity and a challenge. The African Development Bank predicts that the African population will rise from 1 billion people in 2010 to 1.6 billion people by 2030, when it will comprise almost one fifth of the world’s population.

Africa is a long-term investment story that remains difficult to access efficiently. Some countries are already on the path to development whereas others have barely started. Direct investment is fraught with difficulty and uncertainty persists but is likely to become more straightforward with improved liquidity as stock markets continue to develop.

The presence of Nigeria and Kenya as “frontier markets” is encouraging and we will continue to monitor opportunities. But when it comes to testing the water we’ll only be dipping a toe in.


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