We have all heard the bull case for African investment. Many of its economies are among the fastest-growing in the world (from a glaringly obvious low base). About 40% of Africa is urbanised, which is a similar proportion to China. And there is a stabilising economic outlook — or so we were led to believe.
This year, it has not seemed that way at all.
Nick Ndiritu, who co-manages the Allan Gray Africa ex-SA fund, says the "Africa Rising" narrative has been replaced by the exact opposite view of the continent.
John Mackie, head of Stanlib’s Africa franchise, says it has been a year for damage control.
The benchmark MSCI Africa index excluding SA is down 11% over the past 12 months. But a bigger concern has been the lack of liquidity.
Any fund manager trying to sell shares in Nigeria, Zimbabwe or, until recently, Egypt has faced long queues to get money out of these countries and redeploy it, as exchange controls have been tightened.
Fungai Tarirah, manager of the independent Rudiarius Africa fund, says that with some commodity prices down 40%-50%, government revenues have been affected, especially in Nigeria. This has meant some painful adjustment, with the Zambian kwacha, for example, falling 42% against the dollar.
Mackie, though, is more optimistic after the recent floating of the Egyptian pound: "The currency has fallen 50% against the US dollar and I believe it will kick-start the economy."
The main holding in the Stanlib Africa Equity fund is Commercial International Bank, the biggest share in the MSCI Africa index, where it has a weighting of 18%. Mackie says the bank has been protected from the devaluation by its large holdings of dollar assets.
Mackie also holds EFG Hermes — not the scarf and handbag business, but the leading investment bank and private equity business in the Middle East.
Ndiritu likes Eastern Tobacco, the Egyptian monopoly that makes local brands as well as cigarettes on behalf of multinationals such as British American Tobacco and Philip Morris.
Mackie is not as impressed with Nigeria, where he says there’s been a half-hearted attempt at devaluation. With so little access to foreign exchange and limited trading by foreign investors, daily trading at the Nigerian Stock Exchange has fallen from US$50m to $5m.
With 160m people, Nigeria should be Africa’s dominant market, yet Stanlib has cut back its Nigerian exposure to 13%, about half the benchmark weight.
Stanlib still owns the two blue-chip banks, Guaranty Trust and Zenith. And it owns two shares that symbolise Africa’s growth prospects: Dangote Cement and Nigerian Breweries.
Paul Robinson, manager of the Laurium Limpopo fund, says there has been 10.3% compound growth in Nigeria’s cement sales since 1996, yet per capita consumption of 126kg is still well below the global average of 513kg. And the country still has an 18m unit housing deficit.
Ndiritu says there are bargains in Nigeria, with a top-tier bank such as Access Bank on a p:e of less than three.
One of the key differences between the fund managers is their approach to Zimbabwe.
Long-time sceptic Stanlib took a position three years ago, when it looked as though some positive reforms were taking place, but it exited a year ago when it was clear little had changed.
However, for Allan Gray, Zimbabwe makes up 25% of the fund. Ndiritu says businesses such as main brewer Delta and telecoms group Econet continue to improve earnings and market share over the long term. And Econet still hasn’t maximised the potential from money transfers that have become such an important part of the earnings of Kenya’s Safaricom.
But Ndiritu argues that Safaricom is richly priced at about 19 times earnings; he prefers Senegal’s Sonatel on 13 times.
Kenya has proved a safe haven, holding up when other large African bourses, except for Morocco, have been in turmoil. But it has been affected by regulations to cap interest rates charged by banks, which have hit that sector.
East African Breweries, controlled by Diageo, remains popular. It is the fourth-largest share in the Stanlib fund and the fifth-largest in the Old Mutual African Frontiers fund.
Robinson likes Ugandan electricity distributor Umeme. It is a change from the beer, bank and building-material shares that make up the main options in an Africa portfolio. A shareholder keeping Umeme on the road is private equity firm Actis. Within three years twice as much electricity is set to be generated in Uganda for Umeme to sell.
Rudiarius’s Tarirah has been the prime supporter of Morocco. It tends to be an expensive market because of the "hothouse effect" of captive investment from local institutions, so Allan Gray has no Moroccan shares. But it makes up 25% of Tarirah’s portfolio. He says Morocco has reduced its budget deficit and is attracting foreign investment, such as $600m for a new Peugeot plant. Moroccan blue chips include supermarket group Label’Vie, Maroc Telecom and Attijariwafa Bank.
Old Mutual’s Cavan Osborne likes Brasseries du Maroc, a brewery that also sells wine and water. There are compensations to running an Africa fund.