Fund Forum Africa: Investors urged to proceed with caution

Challenging Business Environment

One of the major criticisms of many African markets is that it remains highly challenging to establish a viable business. When benchmarked against developed and emerging markets, the sub-Saharan African region scores badly. Part of this is down to bureaucracy, where costs can stifle and impede innovation and entrepreneurship. A lack of access to bank financing is also a challenge for businesses. Karl Tonna, CIO at FMG Group, said sub-Saharan Africa experienced around 700 hours of power outages per year, the worst for any region in the world. Expensive and inefficient energy markets are major inhibitors to economic growth.

Despite this, there is reason for optimism. The number of conflicts on the continent has declined over the last 20 years, and corruption – while still obviously there – has become less prolific in a number of markets. Africa does remain a high-growth market. Tonna said that out of the top 11 fastest growing economies globally, six were African. These include the Ivory Coast, Ethiopia and Rwanda, the latter of which has made a particular effort in creating a more business friendly environment. However, the stock market remains flat despite this growth.

Fund Manager Attitudes

Conversations with investors several years ago had Africa high on their agendas. The continent’s youthful population and growth potential looked attractive. This has not translated into returns as equity markets have stuttered although managers point out investors need to view Africa as a long-term investment. The recent volatility does, however, present opportunities for asset managers to purchase distressed assets at bargain prices.

However, managers recognise there are major risks in Africa. Political risk is always present, with some managers acknowledging the inevitable leadership succession in Zimbabwe could yield huge opportunities, but also instability. Others highlighted political instability was an issue that affected all markets and that it was unfair to target Africa. One manager cited the woes impacting Brazil and political risk in the US, as issues that firms should be watching carefully.

Currency risk is another problem. The ability to get US Dollars out of any given market is not always assured. Egypt and Nigeria were cited as particularly high on the currency risk scale.
Private equity managers complained of a lack of initial public offering (IPO) activity and exit opportunities, although this seems to be an issue not just confined to Africa. The run-up and immediate aftermath of Brexit has delayed a number of IPOs, particularly in Europe. Improvements have been made though in Africa around transparency at corporates. Transparency has been enhanced, with managers saying they received increased disclosure and reports from the companies they are invested in. This will make international investors more comfortable about investing into domestic African companies.

Investment flows and MSCI upgrades will not happen if market infrastructure is poor. Attaining market scale is essential if regimes are to build market infrastructure. For example, there is no use establishing a clearing house if OTC derivative activity does not exist.

However, there have been calls for cross-border market infrastructures such as exchanges and CSDs to be formed rather than forcing individual countries to build their own at cost. There is close collaboration through an MOU between the Johannesburg Stock Exchange (JSE) and Mauritius Stock Exchange, and some believe the JSE should step in and become a cross-border exchange. Nonetheless, market participants said national politics may stand in the way of this becoming a reality. Another complaint is that custody costs can be very expensive across some markets, and this can discourage managers from investing in those jurisdictions.