Western analysts and fund managers discuss the investment case for Africa

  

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Africa has a population of over a billion with growing urbanisation. By 2025 there will be over 60 cities with more than a million inhabitants. It also benefits from vast mineral resources, being home to 8% of the world’s oil reserves and 7% of natural gas reserves, and a major exporter of both.

Katie Koch, senior portfolio strategist at Goldman Sachs Asset Management, says Nigeria has a number of interesting investment opportunities.

To discuss the investment case for Africa, UK-based financial services firm Hargreaves Lansdown interviewed Anthony Eaton, manager of the JM Finn Global Opportunities Fund; Katie Koch, senior portfolio strategist at Goldman Sachs Asset Management; and Mark Dampier, head of research at Hargreaves Lansdown.

Anthony, you’ve highlighted the investment case for Africa for several years. Why are you so excited about the opportunities there?

Anthony Eaton: The average age in Africa is about 20. In Asia it’s about 30. In contrast, in Europe it’s 40 and in Japan they sell more diapers for old-age people than babies.

The African population is also growing at 2.2% annually compared to around 0.9% in Asia. In about 15 years’ time, the African population is forecast to be about 1.5 billion, so by then it will be one of the biggest working populations on the planet. Productivity has also been rising in Africa since 2000. Previously growth in Africa relied on population growth alone but now you are seeing growth in productivity on top of that. This is all feeding through into rising consumption, which is the widest-margin story in Africa.

Exporting commodities is a low-margin trade and gets them off the ground, but it’s when they start to consume internally that the story gets really interesting. Income has virtually doubled since 2000, and private consumption in Africa is already as big as it is in India and Russia, which are much more universally understood investment areas. Most forecasts anticipate consumption in Africa will double again by 2020, which would put it at the same level as China in 2009.

Another reason I like Africa is because where knowledge is least, margins are greatest. I was talking to a global container terminal operator for example. In Africa margins per container are US$250, in Latin America $125, in Asia $100 per container and in China $50. Africa has got everything going for it in my view.

Do you think concerns such as political instability and corruption outweigh the advantages you’ve just outlined?

Anthony Eaton: I think that view is out of date. There was a survey done by Ernst & Young recently that showed the businesses who operate in Africa rate it second only to Asia as a place to do business. Some of the respondents who don’t do business in Africa rate it as the worst place in the world to do business, so the people who are aware of what’s going on have really moved on from this thing about corruption.

One definition of corruption is where a buyer and a seller trade with each other on a non-competitive basis, a cosy deal in other words. That definition of corruption has really expired in Africa. For instance, the Democratic Republic of Congo (DRC) is an area people perhaps fear and perceive to be corrupt. Six or seven years ago they were short of money and dished out mining licences on a non-competitive basis, which you could argue is corrupt. However, since then all those contracts have been renegotiated on a bidding basis. The DRC government told the miners to pay more or sell out and 90% of the miners agreed. The one outfit that resisted was First Quantum Minerals; their licence was taken away because they wouldn’t pay more and was given to Eurasian Natural Resources. They all went to court in the DRC, the process of law resolved the issue and DRC paid billions of dollars to First Quantum.

So I don’t think you need to worry about corruption in Africa; if you look at Europe, it’s rotten to the core!

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