Africa is the new Asia, Bellevue AM says

Is Africa the new Asia? In many ways it is, according to Malek Bou-Diab (pictured), manager of Bellevue Asset Management’s BB African Opportunities fund.

According to the manager, African economies are going through various phases of adjustment and reform. 

First comes macro-economic management: central bank independence, accumulation of state reserves and improving transparency and visibility.

The next step is to attract foreign investment. 

For this, countries are opening or have liberalised their economies to make investment conditions more favourable and conditions can be patchy, Bou-Diab said, adding that this is a long term process, not a three to five year project.

Even in countries such as Nigeria which relies heavily on volatile oil revenue, Bou-Diab sees the emergence of more dependable banking, real estate and supermarket sectors as a positive sign.

African equities are often volatile, depending as they do on fickle foreign investors.  Even so, the emergence of local pension funds in Egypt, Kenya, Morocco and Nigeria adds weight and depth to each local market.  Nonetheless, markets are often not fully covered on the analyst side. 

“These are not places you can just read a report and make an investment decision.  You need to dig deeper,” the manager added.

Bellevue looks for three key features to evaluate investment opportuniites. Transparency is vital at a fundamentals level, numbers must be correct. 

Access to management is a good way of checking how transparent a firm is.  The continual cycle of crisis and reform is also a core consideration. 

“Future corporate resilience is hard to predict so the team spends a lot of time looking at corporate histories. We analyse the best and worst scenarios, including those of recently IPO’d stock.  It is diligent and hard data collection,’ Bou-Diab said.

In Egypt for instance, as the revolution progressed, the stock market suffered and trading was suspended for nearly two months. 

He added: “The main EGX index started to rebound when a smooth transition seemed to become the most likely scenario.”

The BB African Opportunities team also looks at revenue sources – past, present and future.  Africa is a riskier place to invest than Europe and the USA, so expected returns are higher.

The selection process does not end with identifying companies that meet these three criteria.  There is a market aspect to consider.  Stocks must be liquid but are not necessarily just large caps.  Liquidity considerations make the team more disciplined as they must question why any single stock is not sufficiently traded – there is usually a good reason for it.

The BB African Opportunities fund typically holds 50 stocks from a universe capitalised at around $200bn.

Egypt is the largest country exposure as the team is still positive on the country’s progress to democracy and a more balanced economy. 

Kenya is also getting the macro-economic elements under control after suffering a drought in 2011.  According to the team, poor irrigation and electricity supplies made a bad harvest worse, forcing the country to borrow to import food.  Inflation spiked and interest rates rose to 18% as a result.  The central bank has brought rates down to around 6%, taking the heat of the banking sector.

Nigeria remains a tactical play.  “The country suffered a bout of poor lending which resulted in the creation of a ‘bad bank’.  That has improved the technical positions of lenders,” Bou-Diab  said.

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