Investors buzzing around Africa’s frontier markets

According to the Bank of America, foreign direct investment to Africa doubled between 2000 and 2006 to $315 billion. While African trouble spots from Somalia to Sudan remain out of bounds to all but the hardiest investor, the arguably less newsworthy -- and therefore often more stable-- smaller countries are seen turning a corner and attracting growing interest despite relatively illiquid and immature markets. “You have these second-tier economies coming into their own,” said Razia Khan, chief Africa economist at Standard Chartered in London. “There are a number of economies that have good fundamentals including Ghana, Tanzania, Zambia and Uganda.”

With economic growth of 6% to 7% seen largely immune to a Western downturn -- and increasingly perceived as broad-based beyond the immediate impact of soaring commodity prices -- there is cross-asset interest from bonds to equities to direct investment in infrastructure. Most of the countries have been free of civil wars since independence -- although Uganda has yet to properly resolve its conflict with Lord’s Resistance Army rebels. Some saw coups and revolutions in previous decades, but are now seen as sometimes flawed but stable democracies. Most received debt relief from G8 and other creditors since 2000, freeing cash from loan repayments for infrastructure development. In dollar terms, Ghana’s stock .GHAGH market has delivered some 40% returns so far this year fuelled by an appreciating currency and the soaring value of Ghana and Johannesburg-listed miner AngloGold Ashanti -- as well as upcoming oil production.

 
“TOP PICKS”

Copper-rich Zambia has seen its stock market .ALSLZ rise some 25%, again outperforming the more established sub-Saharan frontier equity markets in Nigeria and Kenya which have moved sideways or lower so far this year. “It is the smaller economies that are showing the growth,” said Ayo Salami, chief investment officer of the $30 million Duet Victoire Africa Index fund, which tracks African equity markets outside South Africa. Standard Bank’s head of emerging markets, Alia Yousuf, says she would ideally like to put most of her new sub-Saharan corporate debt fund in these second-tier markets rather than more overcrowded Nigeria or Kenya. Still fundraising, the fund aims to reach some $300 million. “My top picks would be Ghana and Zambia,” she said. “There is a lot of interest in foreign investment there. The problem is the depth of the market. If you can find a corporate there that wants to expand, then it makes sense but otherwise it can be difficult to find someone to lend money to.”

A similar problem affects equity markets. The smaller countries have minute capitalizations, and often less than a few percent the size of Nigeria’s near $100 billion bourse. Some worry that means the new inflow of cash risks making markets seriously overvalued. “There is a lot of money being raised for Africa funds but the markets are just not deep enough or liquid enough for us,” said Oliver Bell, head of emerging markets for Pictet Asset Management -- starting a new Middle East and North Africa fund but steers largely clear of the rest of the continent. “If you raise $1 billion in Africa now, I just don’t understand where you can put it other than the top three or four names in some of the bigger markets.”

 
AFRICA TO AFRICA

The relatively small equity markets mean many investors see private equity and direct foreign investment as the easiest way to tap growth. The African Venture Capital Association says smaller, more stable countries are seeing inflows boom. As well as funds from the West -- and China, which has surged this decade to become one of the largest economic players in Africa -- they are also attracting increasing inflows from within their own continent.

Zambian commerce and trade minister Felix Mutati told Reuters he expected foreign direct investment to double in 2008 to $3 billion, with funding from China diluted by investments from India, Malaysia, South Africa, Nigeria and Kenya. Nor was it is dominated by money going into the country’s key copper-mining sector, instead being spread across a range of sectors from banking to agriculture, sugar, cement production and mobile phone manufacture. But that is not enough to soothe the nerves of all, particularly with rising inflation stoking political risk. “In terms of how safe the money is, it is not clear in all these countries,” said Pictet’s Bell. “You saw the safest African country Kenya blow up in your face... so at the moment we think it is just too early.” (Reuters)