COLUMN-Is Africa the next big thing for investors?

Thu Feb 13, 2014 3:15pm EST
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By Conrad de Aenlle

LONG BEACH, Calif. Feb 13 (Reuters) - The appeal of investing in Africa is that its future is still ahead of it. The region is setting out on the journey to economic, financial and industrial development that places like Latin America and mainland Asia, the last next big things, embarked on 20 or 30 years ago.

This rosy outlook may explain why Africa's stock markets have done better in the recent past than mainstream emerging markets. The MSCI Emerging Markets Index fell 10.8 percent in the 12 months through Feb. 11, while the firm's Frontier Markets Africa Index, which tracks the continent's smaller exchanges, rose 3.4 percent. Investors apparently recognize Africa as a place to capture growth in a world that otherwise has little of it to offer.

"The compelling case for the region is driven by growth, which is driven by demographics," says Larry Seruma, manager of the $42 million Nile Pan Africa Fund, the best performer among the few funds that specialize in African stocks since it was introduced about four years ago. Economic output per capita "is very low and growing at a very fast rate, and in 2050 Africa will have the largest workforce globally. There will be opportunities [for companies] to provide goods and services to this growing population."

Sub-Saharan Africa is also benefiting from business-friendly policies, such as privatization of state industries and construction of large-scale infrastructure projects, says Babatunde Ojo, an analyst specializing in the region for the portfolio manager Harding Loevner.

Governments "are doing things to reduce the cost of doing business and improve economic growth," Ojo says. The Harding Loevner Frontier Emerging Markets Fund has 26 percent of its $340 million of assets in Africa.

Seruma is excited about Africa's infrastructure development opportunities, including roads as well as power and communication lines "from Capetown to Cairo." He envisions a virtuous circle in which better infrastructure helps businesses reduce operating costs and improve returns, and increase tax revenue. That will create the wherewithal for governments to finance further development. As infrastructure is put in place, more products and services will be available at lower prices and to more consumers, further expanding growth.

For investors interested in joining the march to prosperity, Ojo suggests several stocks from his firm's portfolios that meet this key criteria: "well-positioned, with a competitive advantage in a growing industry." One is a prospective beneficiary of increased infrastructure spending: Dangote Cement PLC in Nigeria.   Continued...