Into Africa: Institutional investor intentions to 2016


Published on

Into Africa: Institutional investor intentions
to 2016 is an Invest AD report written by
the Economist Intelligence Unit that seeks
to capture the changing appetite for
investing in Africa’s frontier and emerging
capital markets. It assesses the changing
risk-and-return equation, and how asset
allocation in these markets is likely to
change in the coming five years. For the
purposes of this report, it defi es Africa’s
frontier and emerging markets as all but
South Africa, which is at a more advanced
stage of development.
The Economist Intelligence Unit bears
sole responsibility for the content of this
report. The fi ndings and views expressed
in this report do not necessarily refl ect the
views of Invest AD. The report was written
by James Watson and edited by Aviva
Freudmann. Stephen Edwards assisted
with the research.

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Into Africa: Institutional investor intentions to 2016

  1. 1. IntoAfricaInstitutionalinvestorintentionsto 2016An Invest AD report written by the Economist Intelligence Unit
  2. 2. Into AfricaInstitutional investor intentions to 2016ContentsForeword 2Preface 3About this research 4Key findings 5I. Introduction: a North-South role reversal 6II. A hopeful decade: Africa’s changing image 8III. Barriers to investment 11IV. The new investment case for Africa 15V. Investor perceptions versus market reality in key markets 18Conclusion 20Appendix: survey results 211 © Economist Intelligence Unit Limited 2012
  3. 3. Into AfricaInstitutional investor intentions to 2016ForewordAfrica is no longer a leap of faithEven well informed observers have written Interestingly, the Invest AD-EIU surveyoff Africa as riven by war, corruption and suggests that investors are largely drawnpoverty, but since the emergence of China by the same “income convergence” storyand India as economic growth engines, that has played out in China and India –many are now asking whether this not the worn, one-dimensional motivationcontinent of one billion people can also of mineral extraction. The emergenceachieve its own “economic miracle” . of a strong middle class in Abuja, Accra, These are still early days but there is no Nairobi and even Kigali is fuelling demanddoubting the promising signs, politically for all sorts of products and services, fromand economically. mobile banking to canned drinks. At a time of huge change, societies As investors see the potential for highare showing that they can adapt, on returns in such ventures, they will committhe whole, peacefully. In the last year, capital, which in turn creates jobs andNigeria, Tunisia, Zambia and Rwanda helps lift incomes. This virtual cycle hashave held elections hailed as free and played out in Asia and Latin America infair by international observers, while a recent years. It is now Africa’s turn for anreferendum created the new nation of economic lift-off.South Sudan. Along with greater political stability, Nazem Fawwaz Al Kudsihas come policy continuity and improved Chief Executive Officer of Invest ADgovernance -- prerequisites for attractingthe long-term investment to generatesustainable economic development. As this report shows, many globalinstitutional investors are now seriouslyintending to take a significant step intoAfrica. This is obviously good news, asit shows that large pools of capital areavailable to sustain the current high-single-digit growth needed to absorb agrowing and youthful population into theworkforce.2 © Economist Intelligence Unit Limited 2012
  4. 4. Into AfricaInstitutional investor intentions to 2016PrefaceInto Africa: Institutional investor intentionsto 2016 is an Invest AD report written bythe Economist Intelligence Unit that seeksto capture the changing appetite forinvesting in Africa’s frontier and emergingcapital markets. It assesses the changingrisk-and-return equation, and how assetallocation in these markets is likely tochange in the coming five years. For thepurposes of this report, it defines Africa’sfrontier and emerging markets as all butSouth Africa, which is at a more advancedstage of development. The Economist Intelligence Unit bearssole responsibility for the content of thisreport. The findings and views expressedin this report do not necessarily reflect theviews of Invest AD. The report was writtenby James Watson and edited by AvivaFreudmann. Stephen Edwards assistedwith the research.January 20123 © Economist Intelligence Unit Limited 2012
  5. 5. Into AfricaInstitutional investor intentions to 2016About this researchOur research for this report drew on two To complement the survey results,main initiatives: the Economist Intelligence Unit also In August and September 2011 the conducted a programme of in-depthEconomist Intelligence Unit conducted a interviews with a range of experts andglobal online survey of 158 institutional senior executives. The insights from theseinvestors on behalf of Invest AD. The interviews appear throughout the report.respondents range from insurance and The Economist Intelligence Unit wouldpension funds through to private banks, like to thank the following individualswealth managers, hedge funds and (listed alphabetically by organisationmutual funds. Investors represented firms name) who participated in the interviewwith a range of sizes based on assets programme:under management. About half haveup to US$499m under management, l Ismail Douiri, chief executive officer,while 22% have at least US$10bn under Attijariwafa Bankmanagement. Respondents were split l Antti Vesa, head of research, Aktiaroughly evenly between North America, InvestEurope, Asia-Pacific, and the Middle Eastand Africa. All respondents indicated an l Robert Mikkelstrup, head of investment,interest in frontier markets, although not Danske Capitalnecessarily in Africa. l Abebe Selassie, head of Africa department’s regional studies, IMF l Nick Greenwood, pension manager, Royal County of Berkshire Pension Fund l Ronald Pfende, chief financial officer, Stanbic Nigeria Additional interviews were conducted for background purposes only. The author would like to thank these individuals for their time and contribution.4 © Economist Intelligence Unit Limited 2012
  6. 6. Into AfricaInstitutional investor intentions to 2016Key findingsl Institutional investors see Africa as l Investors are moving towards l Investors now worry more aboutholding the greatest overall investment longer-term investment strategies for technical concerns than aboutpotential of all frontier markets Africa, rather than more speculative, macroeconomic and political risks, atglobally. At an aggregate level, when short-term bets. Since 2004-05, Africa’s least in key markets. In some regards,asked to choose two regions out of five, capital inflows can be characterised in Africa’s biggest challenge is to overcometwo-thirds (66%) of investors with an two waves: a pre-2008-crisis wave of deeply entrenched perceptions. Butinterest in frontier markets see African low-cost capital in search of short-term a striking shift that can be observedfrontier markets such as Nigeria or Kenya yield, which evaporated at the collapse among investors is a change in focus fromas holding the greatest opportunity. This of Lehman Brothers; and a post-crisis macroeconomic and political worriesputs the continent ahead of frontier Asian emergence of more targeted country- towards more technical market (selected by 44%) and Latin specific investments. Nearly two-thirds Investors were asked to choose up toAmerican ones (29%). Many economic (64%) of investors agree that market three main concerns out of a list of 15forecasters predict that the region’s volatility, partly due to limited liquidity, challenges of investing in African frontiergrowth rate will outstrip all others in the now requires a longer-term investment markets. Although bribery and corruptioncoming five years. Ghana is likely to be the approach. is the headline worry for investorsworld’s fastest growing economy overall (selected by 41%), concerns about weakin 2011, for example, expanding at an l Africa’s emerging middle class is institutions (40%) and illiquidity in capitalestimated 16.3%. catching investors’ eyes, ahead of markets (36%) are not far behind. This commodities and natural resources. The reflects the steady political and economicl Institutional investors plan to continent’s bountiful natural resources— stabilisation of many key markets over theincrease their asset allocation in African from 10% of the world’s oil to as much as past decade. ■markets over the coming five years. 90% of its platinum group metals—hasEven among frontier markets investors, long made it a largely natural resourcesmost are only just starting to explore play. But it is its emerging middle class,African markets. One in five of those which now numbers more than 300msurveyed have zero allocation; among of Africa’s total 1bn people, that islarger investors with more than US$10bn increasingly catching investor attention.under management, this is closer to one in Four in ten investors (39%), when askedthree. Another one-quarter (24%) overall to choose the top three out of 12 features,has less than 1% allocation, often as part selected this as the most attractive aspectof a pooled investment in global frontier of investing in African frontier markets,markets. By 2016, however, all expect to ahead of high commodity prices (34%) orhave some exposure to emerging Africa, high growth rates (35%).with nearly one-third expecting to shift atleast 5% of their fund value there.5 © Economist Intelligence Unit Limited 2012
  7. 7. Into AfricaInstitutional investor intentions to 2016I. Introduction: a north-south role reversalA frica has had several false dawns. landscape for privatised companies has running boom. During 2004-08, real During its drive for independence emerged. Of course, the performance GDP growth across sub-Saharan Africa in the 1950s and 1960s, hopes of some countries has been dismal: was 6.6%, more than twice the pacerose for a dynamic new generation of Zimbabwe’s economy contracted from of the 1980s and 1990s. This slowedpost-colonial leaders. But those hopes regional breadbasket to near basket to a still-healthy clip of 2.8% in 2009,faded in the 1970s and 1980s, for reasons case, while the Arab Spring has disrupted before picking up again to 4.9% in 2010,ranging from widespread corruption several North African states. But barring according to the IMF2. It forecasts growthand despotism, to practical difficulties in such exceptions, there is a general sense of 5.5% in 2011, rising to 5.9% in 2012. Therealigning national economies that had of renewed optimism. Economist Intelligence Unit is slightly lessbeen set up to cater for colonial needs. This may seem an odd time to be bullish, but still forecasts average real GDPFollowing Russia’s perestroika and the considering a renewal of hope in Africa. growth of 4.9% between 2012-16. Thiscollapse of South Africa’s Apartheid The good news notwithstanding, news- is well above expected world growth ofregime, hopes rose again, only for screens remain filled with images of 2.9% in the same period—is far ahead ofdisappointment to set in as it became famine, war and civil insurrections. Western Europe or North America—andapparent that the post-communist “peace But Africa is multi-faceted, and these even outpaces Asia, where much investordividend” would take longer to pay out in difficulties mask a wider vibrancy in many attention is focused (see table).Africa than first expected. countries. Despite a deep global recession Africa’s risk-return equation is also put But the past decade has been, by in 2009, the McKinsey Global Institute into stark relief by the situation in muchand large, a good one for the continent. argued in June 2010 that Africa’s collective of the developed world. The US and theVarious long-running wars have ended. GDP would grow by US$1tr by 2020, Eurozone governments face years ofMulti-party democracy has spread, even taking it to a total of US$2.6tr1 trying to pare back debts. This will eitherthough progress remains patchy. Foreign Such forecasts stem from a long- require reduced spending, higher taxesdebts and government deficits have 1 Lions on the move: The progress and potential of African 2 Regional economic outlook: Sub-Saharan Africa, IMF,been trimmed, and a more competitive economies, McKinsey Global Institute, June 2010 April 20111 Spot the growth Forecast regional growth rates, 2011-16 North America Asia & Australasia (incl Japan) Middle East & North Africa (% change) Western Europe Latin America Sub-Saharan Africa 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 2011 2012 2013 2014 2015 2016 Source: Invest AD-EIU survey, August & September 20116 © Economist Intelligence Unit Limited 2012
  8. 8. Into AfricaInstitutional investor intentions to 2016“The risk profile of Europe is high risk, low return;it’s the worst of both worlds.”Ronald Pfende, the chief financial officer of Stanbic Nigeria neighbours tackle the same kinds of debt lower liquidity; and finally, these are very2 In which of the following frontier markets do you see the biggest issues that they have had to cope with in emerging markets, so you should be able opportunity? past decades.“The risk profile of Europe to pick up some good returns in markets Please select the top two. is high risk, low return; it’s the worst of like these.” (% of respondents) both worlds,” argues Ronald Pfende, the Indeed, institutional investors surveyed Africa (eg. Nigeria, Kenya) chief financial officer of Stanbic Nigeria, a for this report – all of whom have an 66 Nigerian bank that was acquired by South interest in frontier markets globally, even Frontier Asia (eg. Vietnam, Mongolia) 44 Africa’s Standard Bank in 2007.“[Across key if no current asset allocation there – rate Latin America (eg. Argentina, Colombia) African markets] the risk has continued to Africa ahead of all other frontier regions, in 29 decline, but the yields continue to be high. terms of holding the biggest opportunity Middle East (eg. Oman, Lebanon) If people get rational, and not emotional, (see chart). Of course, the key question 22 you will get progressively more money is whether Africa’s new dawn will prove Central and Eastern Europe (eg. Estonia, Serbia) coming through to sub-Saharan Africa.” more durable than before. Inevitably, 17 For investors seeking strong returns, some doubts remain. For decades, Africa Source: Invest AD-EIU survey, August & September 2011 the African story now seems more has been a target for aid, rather than interesting. Robert Mikkelstrup, head of trade and investment. Some investorsor some combination of the two – none investment at Danske Capital, a subsidiary still consider Africa more as a “socialof which will boost growth. As such, of Denmark’s Danske Bank Group with responsibility” investment, rather than aprospects for Western Europe are poor, more than €75bn of assets under real opportunity for yield. This change inwith growth of just 1.5% expected over management, highlights several particular perception is exactly what other emerging2012-16. drivers for considering African fron tier markets have had to go through. A decade All this makes for a striking role reversal markets.“We’re looking at perceived low ago, the perceived risk of investing inbetween north and south. Indeed, many returns in developed markets, so that’s China or Brazil was starkly different fromAfrican countries could be forgiven a one driver; next is lower correlation with today. Africa’s markets have yet to becomesense of schadenfreude as their northerly [developed] markets, partially due to a mainstream consideration for investors. This report sets out to assess whether this l 10% of world’s oil reserves, 40% of is now changing, on the back of a good Africa in figures gold reserves, and 80-90% of chromium decade. ■ and platinum group metals l 54 countries, hosting 29 stock exchanges l Average in inflation during 2000s was 8%, down from 22% in 1990s l Over 1bn people, speaking over 1,000 languages, with 41% under the age of 15 l Average government debt as a percentage of GDP was 59% in 2000s, l 52 cities of at least 1m people, with compared with 81.9% in 1990s mobile phone penetration of about 50% l During the same period, average l Over 300m people now classified as budget balances have narrowed from “middle class” up 27% from 2000 , -4.6% to -1.8% of GDP l 60% share of the world’s arable land Sources: McKinsey, IMF, Ernst & Young, African Development Bank, yet to be cultivated Research and Markets7 © Economist Intelligence Unit Limited 2012
  9. 9. Into AfricaInstitutional investor intentions to 2016II. A hopeful decade: Africa’s changing imageO n the whole, the past decade has including 30 across Africa, in exchange Related to this has been a steady been a good one for Africa. In a for various reforms4. Across the continent, increase in foreign direct investment (FDI), continent commonly associated average inflation rates have fallen from which rose to US$55bn in 2010 from justwith autocratic rulers, there has been 22% in the 1990s to 8% during the 2000s, US$9bn in 2000, according to encouraging spread of elections and while average government debt overall On the ground, companies are payingmulti-party democracy. The most recent has fallen 28%. Both corporate taxes far greater attention to Africa’s emerginghas been in Zambia, where citizens and trade barriers have been cut, and consumer class. Unilever is one example. Inpeacefully voted out a party that had institutional bodies strengthened in many September 2011, it made Africa one of itsruled for 20 years—and the defeated places. A privatisation trend that started in eight global operating regions for the firstPresident actually stood down. As the the 1990s has continued and accelerated. time, to cater for an average 10% revenueEconomist recently noted, such behaviour All this is steadily transforming the growth in the region, compared with 4%is still unusual, but democracy is now far economic landscape. McKinsey estimates across the firm as a whole8. Investors seemore widely practiced3. Between 1960 and that after declining in the 1980s and similar interest rising elsewhere.“Three1991, only one of Africa’s 53 countries held 1990s, labour productivity increased years ago, people were very uncertainpeaceful elections—Mauritius in 1982. by an annual average of 2.7% between about the risks of Africa, but we now seeSince 1991, however, 30 ruling parties or 2000-085. According to a recent forecast certain investments happening fromleaders have been voted out, from Kenya from Standard Bank, a South African bank, some firms,” says Mr Mikkelstrup.“There’s aand Ghana to Nigeria and Benin. Ghana will grow by 16.3% in 2011, making belief in the corporates that they’re willing Greater accountability and political it the fastest growing economy in the to invest in Africa.”stability at the top has helped introduce world6. It has not been alone: between This upsurge in consumer interestother macroeconomic reforms. One 2001-10, six of the ten fastest growing has coincided with a fall in average riskspur to reform has been various debt- economies in the world were in Africa7. ratings in many countries. Across 19 keyrelief programmes, such as the joint African economies rated by the Economist 4 Debt relief under the Heavily Indebted Poor CountriesIMF-World Bank HIPC (Heavily Indebted (HIPC) Initiative, IMF, September 6 2011 Intelligence Unit (excluding South Africa),Poor Countries) scheme, which has given 5 Lions on the move: The progress and potential of African overall country risk ratings have fallen byUS$72bn of debt relief to 36 countries, economies, McKinsey Global Institute, June 2010 an average of 7.6 points to 52.7 (out of 6 African markets: navigating slowing global growth currents, Standard Bank, 16 September 20113 Democracy in sub-Saharan Africa: It’s progress, even if it’s 8 Unilever: Mr Africa, I presume?, Financial Times, October 4 patchy, Economist, October 1 2011 7 Africa’s impressive growth, Economist, January 6 2011 2011 Not a bad growth story Real GDP growth, 2004-12, by category of country 2004-10 2011 2012 average Oil-exporting countries – Angola, Cameroon, Chad, Rep. of Congo, Equatorial Guinea, Gabon, Nigeria 7.8 6.7 6.9 Middle-income countries (excluding South Africa) – Botswana, Cape Verde, Lesotho, Mauritius, Namibia, 3.7 4.7 5.1 Seychelles, Swaziland Low-income countries – Benin, Burkina Faso, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mali, 6.0 6.1 6.7 Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda, Zambia Fragile countries – Burundi, Central African Republic, Comoros, Democratic Rep. of Congo, Côte d’Ivoire, 3.4 0.6 5.7 Eritrea, Gambia, Guinea, Guinea-Bissau, Liberia, Sao Tome & Principe, Sierra Leone, Togo, ZimbabweSource: IMF8 © Economist Intelligence Unit Limited 2012
  10. 10. Into AfricaInstitutional investor intentions to 2016Capital inflows to Africa’s frontier markets haveincreased steadily over the past decade. 100) between January 2000 and August 21% of institutional investors today have3 Africa’s risk ratings Economist Intelligence Unit, risk ratings, 2011 (see table). At a basic level, there has zero allocation in Africa, this drops to just selected African countries (lower is better). been a “peace dividend” paying out in 1% in three years’ time. In five years’ time, January 2000 August 2011 Africa, as the average number of serious all say that they will have some allocations Botswana 37 conflicts recorded each year has nearly in Africa (see chart). Of course, such 30 halved from 4.8 in the 1990s to 2.6 in the allocations will for the most part be small. Namibia 41 2000s, according to McKinsey. In each Most have a less than 2% allocation today, 41 Gabon instance, such as in Angola, a strong but expect to hold between 1% and 5% 57 growth spurt has followed. by 2016. This is especially true for smaller 43 Mauritius Given these two trends, capital funds, with less than US$500m under 40 inflows to Africa’s frontier markets have management, and private banks: across 45 Senegal increased steadily over the past decade. these, nearly nine in ten have at least some 56 46 Abebe Selassie, head of the regional allocation towards African markets, but Zambia studies division within the IMF’s Africa there is significant appetite from a range 70 46 Department, says these inflows have of fund sizes and types. Ghana come in several waves. One pre-crisis wave One example is the Royal County of 64 49 was driven in part by a global liquidity Berkshire Pension Fund, which expanded Tanzania 57 glut, which was halted sharply when its asset allocation into Africa in 2010 49 Lehman Brothers collapsed in 2008. But for the first time, as part of a broader Mozambique 63 over the past two years, capital inflows embrace of emerging markets. Overall, 51 Uganda have picked up again, albeit with greater about 10% of its £1.4bn fund is now 52 61 differentiation on specific markets. invested in emerging markets, of which Cameroon According to investors polled for this about 2.5% goes to frontier markets, 62 53 report, this trend is set to continue in the including Africa.“The intention is that this Equatorial Guinea coming five years. Most strikingly, while will be increased,” says Nick Greenwood, 65 54 Angola 78 4 What is your current overall allocation to assets in Africa’s frontier markets and what 55 do you expect it to be in three and five years’ time respectively? Nigeria (% of respondents) 55 56 Now In 3 years’ time In 5 years’ time Ethiopia 64 Zero 21 1 0 60 Côte d’Ivoire Between zero and 1% 24 7 1 62 61 Between 1% and 2% 30 18 7 Kenya 63 Between 2% and 3% 8 37 14 62 Malawi Between 3% and 4% 3 13 26 67 66 Between 4% and 5% 1 6 19 Zimbabwe 84 Greater than 5% 13 18 33 82 Source: Economist Intelligence Unit Source: Invest AD-EIU survey, August & September 20119 © Economist Intelligence Unit Limited 2012
  11. 11. Into AfricaInstitutional investor intentions to 20165 Please indicate your level of agreement with the following statement: “Africa’s frontier markets will offer the best prospects for investment growth of anywhere in the world in the next decade.” Please rate 1 to 5 where 1 is strongly agree and 5 is strongly disagree. (% of respondents) Strongly agree 18 Agree 34 Neither agree nor disagree 34 Disagree 13 Strongly disagree 3 Source: Invest AD-EIU survey, August & September 2011the fund’s manager. Larger funds polledtypically show a bigger appetite for thelonger term, not least as capital marketsmature sufficiently to be able to absorblarger sizes of investment. Overall, 51%of investors polled – regardless of theirsize – agree that Africa’s frontier marketswill offer the best overall prospects forinvestment growth in the next decade(see chart). Partly as a result of that conviction,about one in three investors, regardlessof their size, expect to put at least 5% oftheir portfolio into Africa by 2016. Even ifconditions cause this ambition to shrinka little, this will still mark a dramatic shiftfrom a decade earlier. ■10 © Economist Intelligence Unit Limited 2012
  12. 12. Into AfricaInstitutional investor intentions to 2016III. Barriers to investment past, but that doesn’t guarantee a good6 What do you consider to be the main 7 Changing perceptions of corruption challenges of investing in African decade ahead. 2001 and 2010 scores for available frontier markets? From an investor perspective, what is countries, Transparency Internationals Select up to three. Corruption Perceptions Index interesting to note is that technical issues (higher is better). (% of respondents) now jostle with traditional concerns, 2001 CPI Score Bribery and corruption 2010 CPI score in terms of the challenges that worry 41 Botswana Weak legal and governmental institutions them. Political risk is a concern, but less 6.0 5.8 40 so than illiquidity in markets, or weak Mauritius Illiquidity in capital markets legal and governmental institutions. 4.5 36 5.4 Political risk For smaller funds that are already more Namibia 32 active in Africa, illiquidity tops the list 5.4 4.4 Lack of depth in capital markets 23 by some margin. Near the bottom of Tunisia 5.3 Weak corporate governance the list is macroeconomic volatility, a 4.3 23 sharp reminder of how far the continent Ghana Currency volatility 3.4 16 has already come in some regards. The 4.1 Poor regulation challenge for Africa, however, is that Malawi 3.2 13 advanced economies such as Ghana and 3.4 Shortage of opportunities Egypt 13 Botswana can sometimes be confused 3.6 3.1 Limited size of the market with their less advanced neighbours. 12 Zambia Overall, bribery and corruption 2.6 Volatility of returns 3.0 11 remain investors’ main worry (see chart Senegal Currency inconvertibility 6). Anecdotally, many executives and 2.9 2.9 11 Macroeconomic volatility interviewees suggest that improvements Tanzania 2.2 7 are being made on this front, but this 2.7 Lack of investment vehicles is where Africa’s perception problem Uganda 5 1.9 Lack of financial understanding is greatest. Most African countries 2.5 among local population remain lodged in the lower rankings of Zimbabwe 3 2.9 International’s (TI) Corruption Perceptions 2.4 Source: Invest AD-EIU survey, August & September 2011 Nigeria Index. Of 15 African countries tracked in 1.0 2.4 2001, eight had improved their scores Cote d´IvoireAfrica has had much to cheer in recent by 2010, with one remaining at the same 2.4 2.2years, but it remains the world’s least level, but six had declined over the period. Kenyadeveloped continent. Wide-ranging risks As many executives point out – and 2.0 2.1remain and investor enthusiasm remains as TI’s index indicates – corruption is Source: Transparency Internationaltempered by enduring concerns. The most hardly unique to Africa. It is similarly rifeobvious of these is the clear political risk in other emerging markets, including of Finland’s Aktia Bank.“We invest inin some countries. The Arab Spring has all the BRIC countries.“There’s some emerging markets quite heavily, and it’s aresulted in some government changes, corruption, but those risks are also within pretty similar situation [across those].” Mrbut a stable new order has yet to take any other country,” says Antti Vesa, the Greenwood agrees:“There’s a perceptionhold. It may have been a good decade head of research at Aktia Invest, a division gap. You get this broad-brush approach11 © Economist Intelligence Unit Limited 2012
  13. 13. Into AfricaInstitutional investor intentions to 2016“I think there is a growing realisation that capital marketsdo need to develop. The democratisation process andthis are interlinked, as [the former] flows though to bettergovernance and better ownership rights.”Nick Greenwood, fund managerregarding corruption, whereas the reality availability of market data, or the ability to but all place relatively poorly and manyis perhaps different. Some so-called conduct cross-border transactions to be have markets are less corrupt than “very effective” (see chart). Nevertheless, imilarly, although the trend is movingsome well known developed markets.” the overriding sentiment is that of slow, in the right direction, democracy Most tellingly, concerns about but steady improvement.“I think there is remains patchy. Only one country,corruption are twice as high among a growing realisation that capital markets Mauritius, is rated as a “full democracy”investors with no current exposure to do need to develop,” says Mr Greenwood. in the Economist Intelligence Unit’s 2010African markets compared to investors “The democratisation process and this Democracy Index. A further eight arewith current exposure (64% compared are interlinked, as [the former] flows regarded as “flawed democracies” along ,to 33%). Among those who are already though to better governance and better with the likes of India, Poland and Peru. Butinvested in Africa, the main concern by a ownership rights.” all the rest fill the ranks of so-called “hybridwide margin is illiquidity. Underpinning this is the fact that regimes” or “authoritarian regimes” such, improvements to the overall business and as Ethiopia, Angola and Zimbabwe. AllInstitutional challenges political environment continue to be hard this isn’t necessarily as grim as it sounds.The mechanisms for conducting and fought. Mauritius places highly (20th out Regardless of the model of democracy,executing trades are one of Africa’s of 183 economies) on the World Bank’s more granular indices suggest thatgreatest weaknesses, at least from an 2011 Doing Business rankings, but is a governance in general has improved overinvestor perspective. In general, investors tiny market. Botswana is next highest in the past half decade. The 2010 Ibrahimrate the effectiveness of various key 52nd position, whereas bigger markets Index of African Governance shows thatmeasures of Africa’s capital markets poorly. such as Egypt and Nigeria languish in 94th just 11 of Africa’s 53 countries had aOnly a handful considers issues such as and 137th place, respectively. Some have worsening governance situation sincethe security and efficiency of settlements, improved, such as Zambia and Cameroon, 2004-05, while nearly all others improved,8 In general, how would you rate the effectiveness of capital markets in frontier Africa across the following measures? Please rate 1 to 5 where 1 is very effective and 5 is not at all effective. (% of respondents) 1 Very 2 3 4 5 Not at Don’t know effective all effective Ability to conduct transactions across borders 7 31 18 27 7 10 Skills and capabilities of capital 15 20 32 23 3 8 market participants Legal and supervisory framework 5 12 30 38 8 6 Security and efficiency of settlements 3 22 30 32 5 8 Investor protection 3 23 21 35 9 8 Transparency 4 15 31 29 15 4 Taxation system 4 18 33 25 6 14 Availability of market data 6 17 31 31 11 4 Source: Invest AD-EIU survey, August & September 201112 © Economist Intelligence Unit Limited 2012
  14. 14. Into AfricaInstitutional investor intentions to 2016“Africa has been in similar stages regarding stock marketsfor years now, and hasn’t risen to the level of other emergingmarket countries, so we’re still a bit sceptical.”Antti Vesa, the head of research at Aktia Investand several markedly so (see chart). Commodity market worries McKinsey, the continent’s households All this has been put to the test in spent a total of US$860bn in 2008, morethe past three years, as Africa has taken Beyond such institutional concerns, a than in India or Russia. It projects thison the massive exogenous shock of the different worry is that of an overreliance to grow to US$1.4tr over the comingglobal financial crisis. On aggregate, it on the global commodity boom. Africa’s decade, with particular growth in foodhas performed well, argues Mr Selassie, vast mineral wealth has been a source and beverages, banking, telecoms andincluding being one of the only regions of good fortune (although much housing. A thriving commodity marketthat actually grew during 2009.“Countries remains untapped), but there is clearly could help catalyse this, but a drop inenacted policies very nimbly, very a concern that many economies could prices likely won’t derail the process.effectively. There’s no longer this sense slow if commodities collapse. This is also Although oil-exporting countries havethat macro-populism is going to help reflected in the fact that investors see the experienced the highest growth sincecountries [develop]. Rather, the challenge highest prospects for return from energy 2004, strong performances have beenremains more that of micro-reforms, such and natural resources (see chart). However, made among both middle and low-as tax compliance, ensuring companies interest is also high in other sectors, income countries.books are audited, those kinds of things.” including construction, financial services A related worry is that Africa’s equity and telecommunications, as these steadily markets are far from immune to global9 Governance on the mend emerge. stock market turmoil. As chart 11 Ibrahim Index 2010, selected countries; higher score is better As such, an expanding consumer class shows, Africa’s frontier markets have is steadily helping to counteract concerns moved roughly in tandem with global 2004-05 2008-09 (latest year) about an overreliance on resources, by markets. Despite the fact that few African Mauritius driving up local demand. According to companies were directly exposed to 79 83 any toxic financial instruments in the 10 Which of the following sectors in Ghana financial crisis, equities have been 60 frontier Africa do you think will offer 65 the best prospects for investment punished anyway. The impact has largely Egypt returns over the next five years? been felt through indirect channels, such 54 Select up to three (from 19 choices). 60 (% of respondents) as reduced export demand and lower Zambia remittances. Nevertheless, it is not hard to 51 55 Energy and natural resources find scepticism among investors, in terms Kenya 46 52 of African equity performance.“Africa has 51 Agriculture and agribusiness 35 been in similar stages regarding stock Uganda 49 Construction and real estate markets for years now, and hasn’t risen 51 Rwanda 34 to the level of other emerging market 47 Financial services countries, so we’re still a bit sceptical,” 47 34 Nigeria notes Mr Vesa. 41 Telecommunications 43 25 Equally, when turmoil sets in, investors Angola Manufacturing globally flee towards perceived safe 31 39 22 havens. On the flip side, as many investors Côte d’Ivoire Consumer goods are quick to point out, the flight from 36 37 21 risk has left a significant mismatch in Source: Ibrahim Index 2010 Source: Invest AD-EIU survey, August & September 2011 valuations, meaning that otherwise13 © Economist Intelligence Unit Limited 2012
  15. 15. Into AfricaInstitutional investor intentions to 2016 promising stocks are potentially trading11 Higher volatility Relative performance of emerging and frontier African stocks vs. world stocks very cheaply. This is a strongly held view: MSCI Emerging and Frontier Africa ex. South Africa Index about seven in ten investors (72%) agree MSCI World Index that reluctance among portfolio investors MSCI Asia-Pacific Index to target Africa’s frontier markets gives MSCI Emerging Markets Index 180 them a greater opportunity to profit. And appetite for a greater weighting in these 160 markets is notably higher among firms 140 that already have some allocation there today. 120 But some are simply constrained in 100 their ability to do so: over half (52%) of those polled say that they would like to 80 invest more in Africa’s frontier markets, but 60 their investment mandates prevent them from doing so.“If things get better then 40 we will probably see some African punts 20 as well within our distribution. Our clients have risk limits, so they don’t really have 0 2007 2008 2009 2010 2011 the buffer to go to the African markets,” Source: Bloomberg notes Mr Vesa. ■12 Please indicate your level of agreement with the following statements. Please rate 1 to 5 where 1 is strongly agree and 5 is strongly disagree. (% of respondents) 1 Strongly 2 3 4 5 Strongly agree disagree Greater regional integration in frontier Africa will be essential 27 49 18 6 to facilitate growth in portfolio investment levels We would like to invest more in Africa’s frontier markets 27 25 18 13 18 but our investment mandate prevents us from doing so Africa’s frontier markets will offer the best prospects for 18 34 34 13 3 investment growth of anywhere in the world over the next decade Reluctance to invest in Africa’s frontier markets among some portfolio investors 27 45 16 12 1 means that the opportunity is much greater for those prepared to take the risk The volatility of returns in Africa’s frontier markets means 34 30 28 8 1 that these investments must be considered long-term The development of capital markets in frontier Africa 34 38 22 61 will help to address broader societal needs, such as poverty Source: Invest AD-EIU survey, August & September 201114 © Economist Intelligence Unit Limited 2012
  16. 16. Into AfricaInstitutional investor intentions to 2016IV. The new investment case for AfricaA s Africa’s markets evolve, so too ahead of raw economic growth and high This gets to the heart of a key shift in do investors’ views of it. The commodity prices (see chart). This view investor interest in recent years. During continent has long been seen is especially held by both the largest and 2005-07, according to Ernst & Young,as a pure natural resources play, with the smallest funds surveyed, whereas the FDI was largely focused on naturalmany investors gaining exposure via mid-sized ones lean more towards growth resources, including minerals, coal, oilinternational mining stocks. While this and commodities. and natural gas10. But between 2007-10,still holds true to some extent, investors’ Regardless, Africa’s burgeoning middle there was a strong diversification intomotivations are changing. At a high level, class is gathering momentum. The African more consumer-oriented areas, such asinstitutional investors show particular Development Bank estimates that about tourism, consumer products, construction,interest in the trend of rising consumerism one in three Africans is now defined as telecoms and financial services. The Investand Africa’s emerging middle class, rating “middle class” using an absolute definition , AD-Economist Intelligence Unit surveythis as the most attractive aspect overall of daily expenditure between US$2 and shows a similar shift in focus playingof investing in African frontier markets, US$209. This amounts to well over 300m out amongst institutional investors: people, a 27% increase since 2000. Along commodities as an investment class is13 What do you consider to be the most with this, sales of mobile phones, TVs, expected to decline in popularity, from attractive aspects of investing in African frontier markets? food and beverages, vehicles and other the most popular today, to third overall. Select up to three (of 12 choices). consumer goods have picked up.“Africa Private equity and infrastructure will gain (% of respondents) is definitely being looked at as a source of the most ground to become the two most Emerging middle class and growing consumerism growth,” says the IMF’s Mr Selassie.“We see popular asset classes. Equities will remain 39 a lot of interest in the region. But markets part of the mix, as the fourth most popular High economic growth rates 35 remain fairly narrow, in telecoms, financial asset class. High commodity prices services, fast moving consumer goods, In terms of the investment vehicles 34 beer, soap and so on.” favoured, 40% of investors expect to use Increasing political stability 28 9 The middle of the pyramid: dynamics of the middle class in 10 It’s time for Africa: 2011 Africa attractiveness survey, Ernst Africa, African Development Bank, April 20 2011 & Young, 2011 Favourable demographics 27 Ability to capture pricing and other market inefficiencies 14 Which of the following asset classes do you think offer the best opportunities for 22 investment in Africa? Please select up to two for each column. Improved fiscal and monetary policies (% of respondents) 20 Today In three years Improving capital markets infrastructure Commodities 43 33 18 Private equity 39 47 Need for greater diversification 16 Infrastructure 29 38 Reduced levels of bribery and corruption Equities 21 22 15 Fixed income 20 15 Agricultural potential Real estate 20 22 15 Government infrastructure spending Currencies 8 6 10 Other 2 3 Source: Invest AD-EIU survey, August & September 2011 Source: Invest AD-EIU survey, August & September 201115 © Economist Intelligence Unit Limited 2012
  17. 17. Into AfricaInstitutional investor intentions to 2016 years, but there’s still a long way to go,”15 Which of the following vehicles do you think currently offer the best opportunities through which to invest in African frontier markets, and which do you expect will he says. Investors agree, noting that offer the best opportunities through which to invest in African frontier markets over while the availability of information is far the next three years? from uniform, there has been a marked Please select up to two for each column. (% of respondents) improvement.“[Corporates] understand Today Over the next three years they’ve got to be better on transparency Multi-asset class funds 35 30 and governance,” says Mr Greenwood. Equity fund 28 40 A broader shift in investor perceptions Structured products 27 27 is towards a more selective, longer-term Exchange-traded funds 22 30 view of African markets. In this sense, Single-asset class funds 20 14 the financial crisis has at least had one Fixed-income funds 20 22 positive effect, which has been to deter Other 1 1 the short-term speculative investments, Source: Invest AD-EIU survey, August & September 2011 or “hot money” that had been a major , facet of capital inflows up until late 2008.equity funds in the coming three years, Maturing corporates— Ismail Douiri, the chief executive officertrailed by both multi-asset class funds and of Attijariwafa Bank, a long-established and investorsexchange-traded funds (both 30%). All Moroccan financial services firm operatingthis is a shift from today, where multi-asset Another factor that is helping boost across several North African markets,class funds are currently most popular interest in equities has been a general says foreign investors have typically been(35%), followed by equity funds (29%) and improvement in corporate governance, opportunistic, looking primarily at thestructured products (27%). with increased transparency, reporting valuation side. He notes that investors To some degree, this picture will and dialogue between investors andlikely evolve as more investment corporates. All interviewees talk of a 16 Please indicate your level ofproducts become available. Berkshire marked improvement.“I’ve been in Nigeria agreement with the followingPension Fund’s Mr Greenwood uses one for about three years now, and from what I statement: “The volatility of returns in Africa’s frontier markets meanspooled vehicle, as “there are not many saw then and today, it’s chalk and cheese,” that these investments must bealternatives” Another benefit he sees . says Mr Pfende.“As you started to get considered long-term.”in such an approach is that it limits the to the tail end of 2006-07, more people Please rate 1 to 5 where 1 is strongly agree and 5 is strongly disagree.time and processes involved in settling globally were investing in Nigeria and (% of respondents)and holding stocks directly.“If there’s 25 they wanted information, so that’s been a Strongly agreeemerging market countries and a 10% push, and there’s been progressively more 34weighting [towards those], it’s less than data provided.” Agreehalf a percentage of the fund, requiring Mr Pfende also notes other shifts, 30 Neutralpowers of attorney and local accounts such as more investor conferences to 28and so on. So it’s easier to do via a pooled discuss results; firms publishing regular Disagreefund.” reports to their websites; and business 8 leaders holding investment road shows Strongly disagree both locally and abroad.“All of that has 1 Source: Invest AD-EIU survey, August & September 2011 developed quite well over the past three16 © Economist Intelligence Unit Limited 2012
  18. 18. Into AfricaInstitutional investor intentions to 2016 CASE STUDY: firms, offering simple, low-cost banking products under a Stanbic Nigeria & Attijariwafa Bank different brand. More recently, the Arab Spring in Tunisia has given it a further boost, by making business simpler and more transparent than before. Two African banks see strong, but contrasting, growth By contrast, Stanbic Nigeria is closely focused on its domestic prospects ahead Nigerian market. Here, growth opportunities feel vast, with less than one in seven of the country’s 158m people holding Morocco’s Attijarawafa bank already has a long heritage, a bank account. Despite this, many local banks have struggled stretching back over a century, but is still finding scope for to come back from a 2009 downturn that exposed how growth. It is Africa’s 6th largest bank, but second biggest overall overleveraged many were.“From an industry perspective, the outside of the South African market. Given Morocco’s relative last two years have really been to a large extent a very inward maturity and banking penetration, it has been eyeing future focused approach, with banks reassessing risk appetite and risk growth in its less developed neighbours for some time now. management processes,” explains Ronald Pfende, the bank’s “We’re looking for growth in markets with similar attributes to CFO. Thanks in part to its 2007 acquisition by South Africa’s ours, but with limited competition and huge margins, against a Standard Bank, which involved deleveraging its entire capital higher cost of risk,” explains Ismail Douiri, the bank’s CEO. market exposure, Stanbic has come out sailing.“We’ve been Since 2005, it has expanded its retail banking into new one of the few looking externally,” says Mr Pfende.“The private markets, with a mixture of M&A and greenfield sites, capturing sector has had single digit growth, while we grow at 40% per market share in Tunisia, Senegal and Côte d’Ivoire, through annum [albeit from a low base].” better processes and local innovations.“Usually foreign banks As in other African countries, the future of banking in skim the market and just address multinationals or private Nigeria is very likely to be mobile. Although fewer than 20m banking clients, but we’re now doing what we did in Morocco people hold bank accounts, over 90m now use mobile phones. 20 years ago, which is going deep into the economy and “There’s 11 licenses for mobile banking and so now it’s a race increasing our banking penetration,” says Mr Douiri. One against time to see which bank comes out with an offering that example of its innovation has been to partner with others captures people,” says Mr Pfende. Across both mature and more to target poorer neighbourhoods, such as money transfer vibrant African markets, much potential awaits.have come in when price-to-earnings (P/E) have returned since 2010, there has been institutional investors. Nearly two-thirdsratios have been at 15 or below, but leave significantly more capital targeted to (64%) of those polled agree that due towhen it reaches 18 or above. specific markets, with countries such as the volatility of returns in Africa’s frontier Mr Selassie characterises this earlier Ghana, Mauritius and Zambia in particular markets, such investments must becapital flow as a first wave, which came attracting capital flows. This more focused considered long-term. ■to a screeching halt with the collapse targeting is being matched with aof Lehman Brothers. As capital inflows generally longer-term perspective from17 © Economist Intelligence Unit Limited 2012
  19. 19. Into AfricaInstitutional investor intentions to 2016V. Investor perceptions versus market realityin key marketsA s this report has argued, investors top ten oil countries globally. 17 Which of the following African are starting to differentiate Nigeria has also reformed its economy markets do you think offer the best between African countries, in significant ways in recent years. For prospects overall for investmentalthough far more of this will be needed. example, the Central Bank reformed the returns over the next three years? Select up to five (out of 30 countries).Investors are naming highly diverse banking sector, which had been labouring (% of respondenst)countries as offering the best prospects under the weight of nonperforming loans. Nigeriafor investment returns in the coming three It set up an asset management company 51years. In terms of popularity with investors, which took on bad loans from troubled KenyaNigeria and Kenya top the list, followed by banks. At the same time, the regulator 48Zimbabwe and Egypt (see chart). allowed failed banks to be taken over by Zimbabwe Of these four leading countries, local and foreign financial institutions. 35 EgyptZimbabwe is a special case. Prior to its The result was a consolidation—with the 34disastrous agricultural reforms and sector going from a peak of 90 banks in Ghanadestabilising politics of the past decade, the mid-2000s to 24 banks by the end of 25it had a well-educated populace and the decade—and a stronger sector overall. Libyaa thriving economy. Much of this lies All this fuels Africa’s second largest 22dormant, as its leader – Robert Mugabe, economy (after South Africa), with average Zambia 18one of Africa’s last “big men” – clings to real GDP growth of over 7% for nearly a Moroccopower. But his departure, when it comes, decade now. This has clearly been boosted 16could pave the way for a rapid economic by demand for oil, but other sectors are Angolaturnaround. Of the other three leading also developing. Agriculture and services 15markets, a potential gap remains between together contribute just as much to GDP Sudaninvestor sentiment and market reality, in as the oil-dominated industrial sector. 15terms of both downside risks and missed Meanwhile, consumer prospects are huge, Botswana 13opportunities. This chapter touches on and most companies expanding into West Tanzaniathree examples of these. Africa see Nigeria as the gateway to the 12 region. Uganda1. Nigeria—investor’s primary target, But despite this vast potential, there 11but challenges remain is good reason for caution. Corruption NamibiaNigeria tops investors’ list overall, is endemic, bureaucracy is slow and 11 Malichosen by more than half as the country crime rates are high. Ethnic and religious 9with the best prospects for overall conflict leads to sporadic violence Tunisiainvestment returns over the next three and uncertainty over Nigeria’s stable 8years. Why are investors so bullish? And democratic future. Democracy remains Algeriamore importantly, are they right? The fragile, despite a largely successful 8country’s most compelling trait is its large election in April. Infrastructure spending Mozambique 7population: at 158m, it has three times as is increasing rapidly, but much existing Rwandamany people as South Africa and over half infrastructure is creaking, particularly in 6that of the USA. It also has 37bn barrels of power generation (there are widespread Source: Invest AD-EIU survey, August & September 2011proven oil reserves, making it one of the shortages) and transport (of which18 © Economist Intelligence Unit Limited 2012