Investment Adviser:

Sanlam Investment Management

(July 2014)

FDI is often cited as a good indicator of how regional economies are growing. In 2013, Africa’s share of global FDI projects reached 5.7% - its highest level in a decade - but the total number of new FDI projects declined by 3.1%, due to political uncertainty in North Africa. What kind of a message do you think this sends investors?


During times of economic and political uncertainty FDI flows can vary depending on the appetite of the investing companies or countries. As equity investors most of the focus is on the broader economic performance, macro data points and company specific financial performance. While looking at FDI is a good indicator of investment interest and economic activity, it would be misleading to look at this indicator in isolation as a message about equity investors’ appetite.


While FDI flows into North Africa have declined significantly, those into sub-Saharan Africa continue to grow by 4.7% in 2013, and at a CAGR of 19.5% since 2007. Regional hubs— South Africa, Nigeria and Kenya, together with emerging high growth economies like Ghana, Mozambique, Zambia, Tanzania and Uganda, are at the forefront of rising FDI levels.


A change in sector focus, since 2009, from extractive industries to consumer facing industries, which are less dependent on FDI flows, have recently become prominent which could explain the survival of a few sectors in Egypt despite low FDI flows. The share of the extractive sector in FDI projects was at its lowest ever level in 2013, while the share of consumer-facing industries, particularly technology, media and telecommunications (TMT), retail and consumer products (RCP) and financial services, has been increasing continuously.


Rapid urbanization, a growing consumer class and investments in infrastructure are laying foundations for the development of urban clusters and corridors. These will be key drivers of economic activity in the future as opposed to just depending on FDI.


In North Africa, only Morocco posted solid growth in FDI inflows (+24%), with on-going political and social uncertainty derailing FDI in the rest of the region. However, big cross-border deals targeting Egypt suggest the possibility of a resurgence of investor interest in North Africa.

Looking at the Fund’s main focus markets specifically - there is a perception that terrorist violence in both Kenya and Nigeria is rising. To what extent would you say this has, or could, affect investor sentiment towards both markets and, subsequently, stock performance?


Nigeria has been one of the key destinations for foreign investment in frontier equities in recent years. Companies and investors have been attracted to the country's booming economy, abundant natural resources and rapidly-expanding middle class. More than USD21 billion of foreign direct investment entered Nigeria in 2013, up 28% from the year before. The country has attracted the most FDI in sub-Saharan Africa since 2007 (Source: Ernst & Young). So far, Nigeria's economy appears to be withstanding security problems. Stocks have not reacted much to terror attacks and Western companies have not announced plans to exit Nigeria due to security issues. The key aspect in Nigeria will be the willingness of corporates to make further investments in capacity and distribution to the northern region of Nigeria where Boko Haram has been launching attacks.


Kenya, on the other hand, relies on tourism for some FX inflows and hence that has impacted FX stability. The terror attacks in recent months have led to travel warnings being issued for Kenya. Tourism is the second largest source of foreign exchange behind agriculture and tourism receipts equal approximately 11% of GDP. Last year tourism dropped by 18% compared to 2012, and represents a growing trend of vacationers avoiding terrorist-targeted countries. The impact on Kenya will most likely be felt in the tourism sector and related industries.


So far there is no data or clear evidence to suggest that equity investors’ sentiment is negative and that there is an impact on stock market performances. We pick portfolio investments in our funds using a bottom up approach and we invest in businesses that we think will survive any political environment.

Three years since the revolution in Egypt, the country’s economy continues to struggle. Have there been any sectors which have weathered this well, or even grown during the last few years?


The most impacted segment in Egypt has been the tourism industry. In 2010, the year before the revolution began, 14 million international tourists visited the country, helping the country earn around USD13 billion. Egypt’s tourism industry accounted for 11% of the country’s GDP in 2010. In Q1 2011, when uprisings began, international tourism declined by 45%. Since then there has not been much improvement in tourist numbers. With the recent elections and a push to increase security the tourism sector could rebound. The property development industry has been least affected as most Egyptians buy houses for cash with little mortgage finance. We have seen listed property companies register improved property sales during the uprising which is a sign that the industry was not affected. In the decade prior to 2011, the sustainable housing needs of Egypt’s young population, coupled with higher government spending on infrastructure, was the central theme of Egypt’s economy. The government is planning a USD40 billion, 5-year project agreed as a joint venture between UAE-based Arabtec and Egypt’s Ministry of Defence. So Construction/ Housing / Building materials are sectors which will/have benefitted.


Can you see a time in the medium to long term future when the economy will fully recover and if not, what does this mean for your investment strategy regarding Egypt?


We are bottom up investors and we look for companies that can survive different political and economic scenarios. We have employed this strategy over the past three years of the crisis in Egypt. So our investment idea generation is not driven by macroeconomic themes but more by company specific dynamics and valuations. The economic recovery will depend on the policies implemented by the newly elected government and this will not occur within a year but could take a few years as reforms take time to implement.


What strategy do you use for investing in countries where there is, or you perceive there might be, political instability?


We are bottom up investors and we look for companies that can survive different political and economic scenarios, as we have done in, for example, Egypt, over the past three years. We like business with cheaper valuations from a P/E perspective and we favour high dividend yield stocks. Wherever we can find these companies we will buy them, without focusing too much on the political environment.


Political instability is just one of a number of perceived negative characteristics of Africa among some investors, along with military conflict and corruption. What can governments and business leaders in Africa do to counter this perception?


With regards to the perception of Africa, it is quite difficult to pinpoint a key solution by governments and business leaders as those perceptions are sometimes driven by colonial Western countries that are trying to undermine the new governments and younger democracies in Africa that took over from colonialists. Broadly speaking, governments could look at engaging mostly with international investors on potential investment opportunities and highlighting government policies and measures that show respect for property rights, free market economics and a willingness to reduce corruption. Business leaders at multinational corporations could also improve the perception by communicating better and in detail with their parent western companies on the negatives and positives of each African country they will be operating in. Businesses should also help government craft policies that are favourable to investors.


Investors also point to illiquid markets and a paucity of stocks on offer in most African countries in comparison with other regions. What would you say to those investors and what is being done by governments and stock exchanges on the continent to change this situation?


African stock markets could improve their efficiency and liquidity by formally harmonising and integrating their operations. As African stock markets have become larger and more widespread over the past decade, there have also been preliminary moves towards regional integration amongst these exchanges. This reflects both the needs of the exchanges themselves and the broader process of regional integration. The integration of financial markets requires the creation of an enabling environment through common policies, institutions and regional frameworks and, above all, Sub-Saharan African political commitment. Most African countries are developing policies that have investor interests aligned with government economic goals. Governments are also ensuring that there is macroeconomic stability and that independent central banks are committed to price stability so that the real value of financial assets is protected. In other countries such as Rwanda and Uganda, governments are also privatising businesses and selling them to investors via stock market listings which increase number of listings.


Governments are also trying to keep the regulatory burden on issuers and market operators to a minimum while not sacrificing the legitimate objectives of regulation. In, for example, Kenya, the government is offering 5-year tax breaks to companies that list on the stock exchange as a way to encourage listing.


Some African funds are very focused on South Africa. While the WIOF African Performance Fund has holdings in South Africa, do you think investors are missing out if too much prominence is given to South Africa in an Africa portfolio?


The decision on the percentage of allocation of South African equities vs. ex-South African (rest of Africa) depends much on an investor’s investment objectives and risk appetite vs. potential returns. Broadly speaking, the South African economy has been growing more slowly than the rest of Africa and this has implications for corporate earnings growth, per capita growth, stock valuations and the emergence of the middle class. South Africa could be viewed as less risky from a political point of view vs. the rest of Africa. However, it will probably not offer strong stock market returns to investors when compared to the rest of Africa.


The objective of investing in Africa outside of South Africa is to tap into the opportunity of stocks which are not so well-researched and that could offer substantially higher returns vs. South Africa which is more well-researched.


African economies such as Nigeria have also seen GDP growth at more than 6% (vs. South Africa at around 2%) and some of the banking stocks in Nigeria have benefitted from this as their earnings have grown by more than 15% -20% with high ROEs and cheaper valuations vs. South African banks. The different GDP growth profiles of the rest of Africa vs. South Africa affect stocks valuations and potential investor returns.


Much is made of Africa’s rising middle class, especially in countries like Nigeria and Kenya where the WIOF African Performance Fund has large holdings. What sectors and socks are seeing the benefits of this rise and is your investment strategy focused on benefitting from the growth of Africa’s middle class?


The sectors that have been benefited most are cement/construction, banks, telecoms/technology and FMCG sectors. Our investment strategy is bottom up and we will look for companies that present good valuation opportunities. We are not limited to themes of middle class growth.


Some examples of the stocks that have benefited from growth of the middle class are given here:








Equity bank



Nigerian Breweries



Taalat Mostafa Group



Eastern Tobacco



Zenith bank



Lafarge WAPCO



Commercial Int Bank




At the same time, some investors say that this is simply a case of something growing from a very small base and that most Kenyans or Nigerians still do not have any money to spend on non-essential consumer items, and hence investment opportunities from middle class growth will be limited for some time. How would you respond to this argument?


There is an emerging wealthy elite in Africa and a strong consumer group, which is growing quite steadily, with, ideally, USD5,000-USD7,000 of disposable income a year, which is USD14-USD19 a day. This expanding pool of consumers is helping to power Africa’s economic boom and we would not agree that consumers cannot afford essentials. What we would highlight is that these African economies lagged developed countries in terms of economic development and their success and growth of wealth will be generational rather than measured over a few years – it takes time for per capita growth to trickle down. Again, investing in Africa is for the longer, not short, term. Expectations are that, over time, with strong GDP growth being witnessed in Africa, consumers will become wealthier.


What do you see as the prospects over the next few months for the economies and markets in which the Fund invests?


We generally look at markets from a longer term point of view and we try to avoid making short term projections or market timing. We believe investing in Africa is a long term story as opposed to being measured over a few months as that could be misleading and lead to over trading the portfolio by getting into and out of portfolio positions based on short term views. However, the prospects for African economies will to some extent be determined by a few factors:


Nigeria is due to hold a presidential election in 2015 and government spending will most likely increase in 2014 and 2015. This should support consumer spending as some Nigerian companies can benefit from pre-election spending. The increasing exposure by the banks to the Nigerian power sector is a clear signal that reforms are being implemented.


We remain positive on the Egyptian political process in the medium term. After three years of North African political transition and instability, we expect political stability following the election of the new president, although we would caution that religious differences could still lead to some disagreements.


Following Kenya’s successful international Eurobond offer in June 2014, we expect some exchange rate stability and support from bond FX inflows and that should help stabilize Kenya’s inflation, which depends on FX movements. We would not expect interest rates to be tightened in Kenya if the currency is stable.

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