The African consumer will drive growth beyond mining

THE time of Africa is coming,” says Renaissance Asset Managers’ Plamen Monovski. His firm has just launched two new equity funds that give access to African stocks (one pan-African, one sub-Saharan) and to say he is bullish on the continent would be an understatement.

He argues that with stock so cheap and foreign direct investment pouring into Africa, now is the time to buy: “To discover a market with such potential, where valuations are very low and yet it’s somewhat de-correlated with global growth, it’s like finding the philosopher’s stone,” says Monovski, Renaissance Asset Managers’ chief investment officer.

The funds’ launch reflects that Africa’s growth story is becoming increasingly accessible to non-specialist investors. North and South Africa have long been targets for high-return investment but, from being the exclusive preserve of adventurous private equity investors and national governments, sub-Saharan Africa is now joining the party.

The IMF forecasts growth of 4.5 per cent for Ghana next year, 6.2 per cent for Tanzania and 7 per cent for Nigeria for example, and predicts that such levels of growth will be sustained, or accelerate, over the coming years.

And sub-Saharan growth is not just about natural resources. Both Renaissance funds, for example, are primarily a play on consumer demand and infrastructure, with 60-70 per cent of their assets invested in these areas. Monovski says: “The consumer elsewhere is very expensive, but here, we’re talking about 6-8 times price-to-earnings ratio. So you get access to a large consumer pool and you don’t pay very much for it.”

Charlemagne Capital’s Sharat Dua is similarly enthused about the rise of African consumption. In particular, he is invested in Zambian company Zambeef, which aims to become Africa’s largest protein-producer. “As the economy grows and incomes rise, ordinary Zambians will start to display greater choice in their consumption habits, for example spending more on food. Currently, in South Africa, per capita chicken consumption is 20 kilos per annum. In Zambia it is only two kilos per annum.”

In addition to this growing wealth, says Silver Street Capital’s Gary Vaughan-Smith, the continent’s burgeoning population and urbanisation should ensure that food production is in high demand. Silver Street’s agricultural private equity fund targets farmland and related businesses like fertiliser and machinery producers.

Monovski says that this building interest in the African consumer is in part due to the financial crisis. “In a period when the majority of the world saw GDP decline and commodity prices fall, Africa as a whole grew 3 per cent. Everyone realised there was a domestic driver of demand.”

But there are still sceptics. Courtiers Investment Services’ Gary Reynolds is convinced that statistical analysis shows that the risks of investing in many African countries are not worth the benefits. He plotted GDP per capita against countries’ scores in the World Economic Forum’s global competitiveness report and concludes: “Africa is virtually uninvestible.” This is in part due to political risk and lack of transparency and in part due to liquidity concerns.

While many countries have made significant progress in improving their governance, investors would still be best-advised to stick with fund managers who have experience doing business in Africa. Dua, for example, insists on going to meet the management of any company in which he invests, while Renaissance’s Africa fund managers have managed funds on the continent since 2005.

As for liquidity issues, investors should not expect to move in and out of African stocks as they can in more advanced emerging markets. But for the right size of fund and timescale – over years, not months – there is growing liquidity in the larger markets. Monovski highlights that Nigeria’s stock market, for example, can easily turn over $20m-$25m “on a good day”.

Even considering the risks, therefore, there should be room for African stocks in a portfolio targeting high returns. The investment world is now used to talking about the Chinese and the Brazilian consumer. Over the next decade, we will also become accustomed to considering the demands of the African consumer.