Investing in Africa is becoming easier, with two Africa-specific unit trusts and one exchange traded note (ETN) now available on the JSE. However, for the individual, accessing this market alone would be impossible.
Excluding South Africa, the aggregate market capitalisation of African markets is about $250 billion, or about 20% of gross domestic product (GDP). In contrast, companies listed on South Africa’s JSE have a capitalisation of about 270% to GDP, which drops to about 150% if you exclude companies with primary listings in Europe. Africa still has a long way to go in this and other respects.
The pros and cons
The challenge in Africa is poor liquidity (annual value traded/market capitalisation). Often, there are a few stocks which account for a disproportionate share of the country’s total market capitalisation. Further, the free float of shares available for trading is reduced by the large fraction of strategic stakes held by multinationals, or the buy-and-hold-forever stakes held by local pension funds with limited investment alternatives in listed equities.
Nick Ndiritu, a member of the Allan Gray investment team, says: “As value-oriented investors, we view Africa’s growing credibility as an investment destination with both optimism and caution.
“Reasons for the current optimism have been well documented and include: a population close to one billion underpinning a large and growing consumer class, rapid urbanisation trends and recent productivity gains; resources-led trade and infrastructure investment flows; and improving political governance, competitiveness and macro-economic stability. On balance we believe Africa presents an attractive set of opportunities for long-term investors,” says Ndiritu.
“Changing perceptions about the continent and developments in developed markets are fuelling a sharp rise in private capital seeking a home in Africa. Net inflows into African regional funds investing in public markets totalled $660 million for the 12 months to September 2010, close to four times the prior best year in 2007,” says Ndiritu.
Few advisers are coming out and saying Africa is for the retail investor yet, but typically the high net worth individual (HNWI) follows the institutional market with a similarly long-term investment horizon.
Only way in is via a fund
One way of investing in Africa is through traditional unit trusts: the Investec Africa Fund or the Stanlib Africa Fund. In addition, Standard Bank recently launched the first listed passive exchange traded note (ETN), the Africa Equity ETN which tracks the performance of the Standard Bank Africa Equity Total Return Index. The ETN has a broader exposure to Africa than either of the two funds, and as an index tracking note its fees are substantially lower with liquidity guaranteed by Standard Bank.
However, as the ETN was launched only a month ago, it remains small with a market capitalisation of only R2 million. To have an index tracking ETN, you first need an index, and Standard Bank leveraged its position as having one of the widest footprints in Africa to establish the Standard Bank Africa Total Return Index. It is a first in the market that Standard Bank hopes will become the market standard as a pure Africa (excluding South Africa) diversified index.
Compared to the much more restrictive S&P Africa index series which is heavily weighted to the liquid markets of South Africa, Mali, Nigeria and Egypt, Standard Bank’s index covers a much broader 29 countries and 178 stocks, all of which are “investible,” explains Standard Bank’s Johann Erasmus, a Standard Bank director: global structuring group. The index diversification is important due to the already mentioned constraints of African exchanges, such as poor liquidity, and it provides investors with a broad investment base exposure of North and Sub-Saharan Africa.
“We wanted broader access and sufficient diversification that no single geography, company or sector would represent an overweight exposure and introduce massive influence or volatility.
Diversification the central theme
“For someone who wants to invest in Africa — and retail investors who believe in the investment case ought to be looking at it considering Africa’s success – the question is where to start? In our ETN, the index rules require that no single country can represent more than 20% of the index, and no single company more than 5% of the index (and of course South Africa has none).”
Making up the major part of the index representation are the major economies: Nigeria, Egypt, Kenya and Morocco; with the rest split fairly equally among all the other economies, which include some oddities like Burkina Faso and Sierra Leone.
“As to themes, the index current sector allocation represents 34,7% in basic materials; 34,2% financial sector; 9,2% consumer sector; 8,1% telecoms; 7,9% oil & gas; and 5,1% industrials. The index is rebalanced twice a year in April and October, and what we’re seeing with each rebalancing is that resources and financials have lost share in the index representation each time in favour of the other sectors — this reflects the growing maturity of the continent’s economy into other sectors,” explains Erasmus.