Investors are heading ‘Into Africa’, says report

Invest AD Mohammed Al Hashemi, Head of Asset Management, 24 Jan 2012. By viewing this video or reading the following transcript you are agreeing to accept the Cantos Terms and Conditions.

Invest AD has released a report, Into Africa, written by the Economist Intelligence Unit and based on a survey of institutional investors such as pension funds and insurance companies, why did you commission this report?

“We at Invest AD have a number of funds invested in Africa, and over the course of the past year in particular we’ve detected increasing interest in allocating capital towards that continent. So with the survey what we wanted to do is to get a better gauge of the scale of that increasing interest and we’re actually quite pleased by the results of the survey.”

What were the highlights of the results for you?

“One of the key messages that came out of the survey is the degree to which the allocations into the African markets will change over the next few years. For example, at the moment, many of the investors surveyed don’t have any allocations in Africa, yet looking further out over the next five years, the bulk of the investors will have an allocation into Africa and indeed, a notable portion – about a third – will have more than 5% allocation and that’s quite a significant change. It was particularly pleasing for us to see that result, having been active in investing in Africa. It shows that there is a convergence, if you will, of interest that is gathering momentum over the next few years.”

And why is it now in particular that these institutional investors are looking to move into Africa, or increase their allocation?

“Historically, Africa has been seen more as a commodities play, and perhaps that’s still the case. However, what the survey also shows is that this is actually changing. Indeed, investors who are looking to increase their allocations to Africa are doing so more because of other themes that are emerging there. For example, urbanisation, greater consumer spend, the rise of the middle class and all of these themes are real economy themes, so they give more diversity to the rationale and the reason for the increasing allocations there. Indeed, it’s a virtuous circle because with greater capital flows into those economies there is greater job creation. That in itself will lead to greater consumer spend. It will liven up sectors of the economies in those nations that perhaps haven’t existed before.”

But we’ve heard about hope for African prospects in the past and not had those hopes fulfilled. Is it not still too risky?

“When we look at the changes that have been happening in Africa and particularly in the last few years, we’ve seen greater political stability. That in itself leads to greater consistency in policies and typically that drives greater governance as well. Indeed, when we’ve been on the ground visiting companies there, talking to decision makers, we have seen a distinct shift towards adoption of better practices as far as governance is concerned, and that in itself should be also encouraging greater capital flows. Again, it’s a virtuous circle.

Having said that, as well, when you look at how some of the current prominent emerging economies have evolved, when you look at how they’ve evolved over the prior decade, they also suffered from a number of issues such as corruption and lack of governance in the earlier stages of their evolution. But what we see in Africa is they’re heading in the right direction.”

Do you think that the results of the survey will truly play out in capital flows, or were institutional investors simply looking elsewhere given the volatile market conditions?

“When you look at the expectations for growth around the globe, currently, most developed economies are expected to grow at sub-par, sub the historical averages for the next few years, whereas frontier and emerging markets are still likely to deliver superior growth relative to developed markets. In the context of the African economies themselves, they’re likely to deliver between 4% and 6% on average for most of them. With that in mind and also bearing in mind that most investors typically seek higher growth opportunities, above average growth opportunities, we believe Africa should continue to attract interest over the next years. So bear in mind this particular survey had over 150 respondents who represent quite a diverse spectrum of investors from pension funds, boutique asset managers, larger scale asset managers, etc. So that in itself shows quite a strong convergence of opinion towards increasing allocations towards Africa.”

And what kinds of sectors and companies is Invest AD’s Africa fund investing in?

“Well we tend to favour sectors that benefit from a number of the themes I referred to earlier. For example, the greater consumer spend, the rise of the middle class, etc. An example of one sector we’re quite keen on across a number of the African markets is telecoms. Currently, mobile telecoms penetration is quite low by the standards of advanced emerging markets or developed markets. For example, in many countries it’s 25% or less, so there is great scope there and great potential for growth.

Another sector that we’re keen on is the banking sector. For example, in Nigeria, the banking sector in Nigeria has withstood the impact of the global economic crisis over the past few years quite well. And in particular as well we like the benefits of the greater consumer spend, the rise of the middle class insofar as credit growth expectations for these banks. So these are a couple of examples of sectors that we’re quite keen on, or themes we’re quite keen on in Africa, but there are a number of others that we’re continually looking at as well.”