Starting a stock portfolio for Africa
an Afristrat uStrategy Book
Hartmut Sieper
Published by Conceptualee, Inc. at Smashwords
Copyright 2010 Conceptualee, Inc., Creator of Afribiz, Afristrat, and uStrategy Brands
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Table of Contents
The following is a list of major sections in this strategy book.
Context for Investment
A Snapshot of the African Stock Markets
An Approach to Starting an African Stock Portfolio
Conclusion
Key Points
Resources
About Author
Context for Investment
While private wealth in developed nations struggles to recover from the economic crisis, the situation in Africa is remarkably bright. Africa, the colorful continent that consists of 53 nations, has prepared the stage for abundant wealth creation in this decade and beyond.
Major paradigm shifts can be observed in the world that will dramatically change current patterns and shape new global economic situations. First, Europe and America are quickly changing from stability to instability, having started with financial uncertainty and now moving to economic problems and later even to political insecurity and social unrest if not contained. Africa, on the other hand, will become more stable and will be considered less risky in the future. The view of Africa compared to the rest of the world will balance out.
While media still lags behind in sharing positive headlines about Africa, there is a shift to more holistic reporting. The more success stories told about Africa, the more potential investors will pay attention to Africa as an investment destination that is worth considering.
Finally, development aid will successively be replaced by investments. In fact, the flow of investment into Africa surged to $38 billion in 2006, according to the United Nations Conference on Trade and Development. According to the World Bank, Official Development Assistance (ODA) to Sub-Saharan Africa was $32 billion in 2005. Investment and trade are truly beginning to overshadow aid.
Also, more African political and economic leaders are promoting foreign direct investments instead of development aid. They want to attract serious businesses and sincere investors to their countries. Western companies and entrepreneurs are offered many investment incentives.
The classic concept of helping poor African nations by granting credit and donating goods and money is not the Africa of today. For example, Nigerian President Goodluck Jonathan stated at the G8 African Leaders Outreach at the G8/G20 Toronto Summit in June 2010 that his country would prefer removal of trade barriers over aid.
Africa itself speaks the clearest on its compelling investment case in five areas – macroeconomic stability and economic reform, low inclusion in world financial systems, fewer conflicts, abundant resources and a large, growing, under-tapped consumer market.
Macroeconomic Stability and Economic Reform
The macroeconomic situation is favorable. Short-, medium-, and long-term growth can be expected for most countries. In 2010, economic growth is expected to be between 4.5% and 5% in Africa, according to the African Development Bank (AfDB). Growth is expected to rise going forward, but possibly tempered because of the pace of the global economic recovery. There will be different patterns between regions, oil and commodity-rich countries, and other nations. As an investor, you can monitor the macroeconomic situation by tapping information available on each country through its Central Bank and International Monetary Fund (IMF) reports.
Also, governments have demonstrated strong commitment to economic reforms, which has resulted in improved legal frameworks for investors and companies. A good example is the introduction of one-stop shops that allow foreign investors to found companies in a few days, compared with the norm of several weeks or even months. In Rwanda, you only need three days to launch a company. To found a company in Botswana from Europe, one can do all the paper work at the London office of the Botswana Export Development and Investment Agency (BEDIA).
Low Inclusion in the World’s Financial Systems
Africa’s low financial inclusion into the world’s financial systems, which was considered negative in the past, is now revealed to be a blessing. Toxic assets have not found their way into balance sheets of most African banks. Asset price bubbles, fired by credit inflation, could not develop because of limited availability of loans and high interest rates. There is no excess liquidity in Africa that could have led to artificially high prices. Where asset prices are high, the main reason is a combination of elevated demand and lack of supply. Africa has shown an impressive robustness against the world financial and economic crisis.
Note: Africa did experience varying levels of disruption in trade and investment due to the global economic crisis. However, these areas are on the rebound.
Fewer Conflicts
The decline in political conflicts and wars makes Africa less risky. While the news still often reports of eastern Democratic Republic of Congo (DRC), Somalia and Sudan, investors should remember that these are a few out of 53 countries.
There is a strong trend towards democratic or open forms of government. Also, stronger institutions are on the rise.
Natural Resources
Africa’s natural resources are not only abundant but diverse. A number of countries have many natural resources. For example, the DRC has an abundance of water, arable land and dozens of different mineral resources.
An investor can get additional information on natural resources within a country from the appropriate government agency, e.g., the ministry of mining or minerals. Also, the United States Geological Survey department develops a brief of the mineral industry for each African country on an annual basis.
Large Consumer Markets
The African population will grow to 1 billion in 2010 and reach over 2 billion in 2050 while Western markets will shrink. The five largest countries by population are Nigeria (152 million), Ethiopia (88 million), Egypt (80 million), Democratic Republic of Congo (71 million) and South Africa (49 million), according to The World Factbook.
Vijay Mahajan, author of Africa Rising: How 900 Million African Consumers Offer More Than You Think, says there is a large middle class with unmet needs in Africa. This middle class needs basic services like housing, energy, education, health, food and transport. They have money to pay for it. They are unlike their Western counterparts who carry too much debt. However, the African middle class, like other middle classes in developing countries, does not have average annual incomes upward of $30,000 like the Western middle class. On the other hand, the large population can offset this.
Another issue facing investors and businesses is the fragmentation of the African consumer markets. Many countries have fewer than 5 million people. This is one reason why African countries are driving regional integration to enlarge the consumer markets. In fact, the East Africa Community (EAC) formed a common market this year with a population of over 130 million. This can make it and its member countries – Rwanda, Burundi, Kenya, Uganda, and Tanzania - a market size on par with Nigeria.
As a result of these encouraging factors, international investors are beginning to explore Africa. The most important targets are the commodities sector for global resource companies, agricultural land for sovereign and industrial investors from East Asia and the Middle East, the stock markets for global financial investors, and do not forget the large consumer markets.
A Snapshot of the African Stock Markets
Africa currently has 23 stock exchanges – many more than most investors would expect. However, most of these stock markets are very small. The biggest is the Johannesburg Stock Exchange (JSE) in South Africa, accounting for 70% to 80% of the overall market capitalization of $1 trillion in Africa. The JSE market capitalization at the end of June 2010 was about $735 billion.
The next grouping is stock exchanges with at least $10 billion of market capitalization. This includes the Egypt Stock Exchange ($70 billion), Bourse de Casablanca in Morocco ($65 billion), Nigerian Stock Exchange ($45 billion), and the Nairobi Stock Exchange in Kenya ($12 billion). These levels allow institutional investors to buy and sell in reasonable quantities.
The third grouping consists of stock exchanges with market capitalization between $2-$10 billion. This includes the Ghana Stock Exchange, Lusaka Stock Exchange in Zambia, Zimbabwe Stock Exchange, Khartoum Stock Exchange in Sudan, the Botswana Stock Exchange, and others.
The final grouping consists of stock exchanges with less than $2 billion of market capitalization. Very low liquidity and a small number of sporadically traded stocks are characteristics of these stock exchanges, including Cameroon, Algeria, and Malawi.
Current Development of African Stock Markets
Although the Bolsa de Valores de Angola, the Angolan Stock Exchange, has already been legally founded, there is no trading yet. Market watchers estimate that trading will start with government bonds, while stock corporations will be introduced later. One of the major obstacles is the fact that the big Angolan companies are very well capitalized; they just do not have the need of going public.
Perhaps trading will commence earlier in the other newly-established stock exchange in Rwanda. One Kenyan counter is already dual-listed in Kigali. Furthermore, a new stock exchange has been recently established in Libya.
Not only will new stock markets be launched, there are also considerations to merge existing markets. There are plans to integrate the West African stock exchanges into one big market, as well as the EAC stock markets. Electronic trading platforms are being established to improve liquidity in the regional stock exchanges as well. India is partnering with the African Union to develop a Pan-African electronic trading platform.
Regionalization of the stock exchanges is in line with the trend towards regional currencies. The West Africa Monetary Zone (WAMZ), including Nigeria, Gambia, Guinea, Ghana, and Sierra Leone, plans to introduce a new regional currency, the Eco, by 2015. At a later stage, plans are that the Eco will merge with the West African CFA Franc, which is currently pegged to the Euro. Similar plans are under discussion in the EAC and the Southern Africa Development Community (SADC).
An Approach to Starting an African Stock Portfolio
Investors who want to start investing in Africa with a stock investment portfolio have to consider various parameters, including investment vehicles, country selection, industry focus, research sources, analysis methods and investment styles. But remember, your starting point is having an investment strategy to guide your decisions.
Key 1: Choose an Investment Vehicle
Let us start with the investment vehicles that allow exposure to African markets. The best possibility is to buy and sell original shares at the local stock exchanges. By doing so, you have access to all counters that are traded on the markets, without any restrictions. However, this level of flexibility requires a lot of preparation and administrative work.
Some brokerage firms, e.g., Securities Africa (Bermuda), Renaissance Capital (Russia), and African Alliance Capital, cover a large number of African stock exchanges and can handle orders for the different markets by using correspondence brokerage firms in the respective countries. I prefer this method because you do not have to open separate brokerage accounts in several countries, which would require a lot of traveling and might become costly.
It is also necessary to transfer funds from one country to another, if country weightings are changed. (In a global portfolio, the different country weightings that are expressed in percentage points and the liquidity add to 100%.) For example, if you sell Safaricom stocks at the Nairobi Stock Exchange and need to transfer the sales proceeds to Nigeria where you want to buy Nigerian bank stocks, you not only have to exchange Kenyan Shillings into Nigerian Naira but would also have to organize a proper money transfer. Again, this can be time-consuming and expensive. You have to wait until your money arrives in Nigeria before you can buy the Nigerian stocks. However, perhaps in the meantime the stock prices have moved higher.
On the contrary, having only one trading account that can be used for stock market transactions in all markets offers the highest flexibility. Cash management is a lot easier.
For security reasons, it is advisable to hold a custodian account with a global custodian bank that is able to handle all your stock market transactions. Remember, your brokerage company only executes the buying and selling. The settlement of your trades by payment versus delivery should be done separately.
This is the normal way institutional investors are managing their portfolios. For example, the Luxembourg-based, open-end mutual fund “Nestor Africa Fund,” which I advise, uses Securities Africa based in Johannesburg as its brokerage company. And, Nestor Africa Fund uses Barclays Bank of Mauritius as its global custodian. One hundred percent of all stock market transactions have been executed properly since the inception of this mutual fund.
Having individual accounts in various countries, preferably through a brokerage company that can handle all African markets, does make sense for institutional investors and high net-worth individuals who allocate considerable funds to the African stock markets.
Africa Plays” as an Investment Vehicle Option
For small investors, as well as for those who just want to allocate a small percentage of their funds to Africa, other options are better. First, they can buy stocks of “Africa Plays.”
“Africa Plays” are listed companies having most of their business in Africa, yet are listed on Western stock exchanges. Most of them are mining and exploration companies listed on stock exchanges in Canada, London, Sydney and the U.S. Therefore, resource stock investors find a big variety of African-related companies they can easily invest in without having a brokerage account in Africa. Many “Africa Plays” have large market capitalization and are very liquid.
What is the main reason that African resource stocks are not listed on African stock exchanges? The reason is very simple. The stock markets of Toronto, London and Sydney have a long tradition of equity financing of exploration companies. These enterprises usually do not make any turnover in early stages of business, but have to invest a lot of capital in the acquisition of exploration and mining rights, machinery, drilling and researching. These companies do not get credit from banks due to very high risk and general lack of collateral. Equity financing is the best possibility and the common source of getting working capital. The African stock exchanges neither have the tradition nor the liquidity to accomplish this task.