Africa: the final frontier for world investment

The continent is barely on the map for emerging markets investors. But things could change rapidly, says Alison Eadie

Africa is the final frontier of emerging markets. Much of it is under-developed and as yet of little interest to foreign investors, but the South African stock market is the world's fifth largest emerging market, according to the IFC Global Composite Index.

While there are several South Africa funds available to private investors, few range across the continent. Barings Simba Fund and GT Africa Fund are, however, both widely invested. Simba is presently in nearly 20 countries, with only 30 per cent of assets in South Africa.

Arnab Banerji, chief investment officer of Foreign & Colonial emerging markets, questions whether a bourse as sophisticated as South Africa's, listing international companies Anglo-American Corporation and De Beers, can really be described as emerging. However, South Africa fits the World Bank per capita income definition of an emerging country.

South Africa, which inevitably dominates African portfolios, has been shunned as too expensive by many fund managers this year. Foreign money poured in last year, pushing the stock market higher, only to see it fall by 17 per cent in the first seven months of this year. The rand has also depreciated by 20 per cent, hurting industrial companies more than mining interests, which are priced in dollars. Prices have not come down enough for value investor Ewen Cameron Watt, head of emerging markets at Mercury. "If I could find cheap stocks, I would buy more."

The issue of exchange controls hangs over the market. Fears that a flight of domestic capital will follow liberalisation of exchange controls have undermined the rand and led to uncertainty for investors. Until capital flows freely (only asset swaps are presently countenanced) the rand may continue to fall, some believe.

Others are more optimistic. Neil Gregson, manager of the Credit Suisse South Africa unit trust, thinks the run on the currency is nearly over, setting the scene for a significant interest rate cut which will stimulate the economy. He points out that the South African market has never been as cheap as some other emerging markets, but that did not stop it outperforming in 1994 and 1995.

Arnold Shapiro, manager of Old Mutual South Africa investment trust, believes value is returning. Price/earnings ratios are 15 on a current- year basis against 20 a year ago, and corporate earnings growth is robust at 15 per cent this year. South African companies, shielded from the outside world by years of sanctions, are learning to compete.

However, the country's future hinges more on growth in neighbouring states. With peace returning to former war zones, the full potential of resource- rich Mozambique, Angola, Botswana, Namibia and Zimbabwe is yet to be felt.

Of greatest interest at the moment, according to its manager Michael Power, is Egypt. The government is managing the economy well, privatisation is progressing, Egyptians are returning and investing in their country, stock market liquidity is rising and shares are cheap, he says.

He points out that Egyptians are not new to the equity game. In 1955 the Cairo stock market was fifth busiest in the world in turnover terms, listing the Suez Canal and Ottoman Bank among its stocks. There are nearly 1,000 stocks listed on the Cairo and Alexandria markets.

Institutions have been attracted by Egypt's price/ earnings multiples that last year were half the emerging markets' average, and several single country funds have been launched to invest in Egypt. Despite a stock market capitalisation of $8bn - bigger than Hungary or Poland - Egypt has yet to make it into the benchmark IFC index, although its inclusion is expected by the end of this year.

Elsewhere in Africa Mr Power likes Mauritius and Zimbabwe. The Mauritian economy is growing rapidly, spurred by a well educated and hardworking population, and investable businesses range from hotels and airlines to textiles, sugar and banks. The Zimbabwe stock market has also been strong in recent months and there is no shortage of well managed companies to buy, says Mr Power.

Cautious investors wanting a stake in Africa can opt for a South Africa fund which makes the occasional foray into Zimbabwe or further afield. The Old Mutual trust, which has a strong track record, is presently at a 17 per cent discount to net asset value.

General Africa funds are higher risk and have higher costs. GTF's fund has a minimum investment of $10,000, a 2 per cent annual management charge and is incorporated in Bermuda, so is outside the UK regulatory system. The Simba fund is a London listed investment trust with an annual management charge of 1.75 per cent.

Those with true pioneer spirit could dabble in direct investment. Trans Zambezi Industries, dubbed the Hanson of Zimbabwe, recently issued more shares on the Luxembourg stock market and is aiming for a partial listing on the Zimbabwe Stock Exchange. Formed three years ago, the company has achieved earnings growth of 24 per cent a year in dollar terms from four main divisions - financial services, food and distribution, industrial and investments.

London-listed Lonrho, always an Africa play, will be so in purer form after the impending demerger. The African mining interests will end up with Anglo-American as the largest shareholder and the African trading interests, including hotels in Kenya and Mauritius, will be headed up by Dieter Bock, the present chief executive.

Africa is barely on the map for many emerging markets investors. Global funds have only 5 to 10 per cent of assets there, nearly all in South Africa. Much of the continent is too poor, rural, politically unstable and lacking in capital markets to be of interest.

However, economic reform is well under way in many countries. GT points out that many embryonic African stock markets are the same size now as those in Thailand, Turkey, Argentina and Chile were in 1987. The question remains: will African countries emulate the success of emerging markets elsewhere?