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As developed markets struggle with their economic recoveries and emerging market economies slow, some investors are turning to frontier markets like Africa for investment opportunities.Business Insider spoke with Robert Scharar of Commonwealth Funds who has visited Africa for 16 years. He started his Africa Fund in November 2011.
Most people focus on commodities and invest in the resource rich areas of Africa. However, Scharar believes great opportunities exist in sectors like finance and retail as Africa’s middle class expands.
What are the investment themes that make Africa such an interesting investment opportunity?
Africa is experiencing this sort of evolution to a broader Middle Class where education, through improvement of access to food supplies, through political stability, and I think out of that comes some of the themes of investing in Africa.
My view is if you want to start with a broader context on this, one of those would be infrastructure. Clearly the continent is going to have major projects in that area. You hear a lot about the mineral and resource plays and sure they’re there. That’s a story for Africa but it’s a story in a lot of places in the world. You can go to Indonesia, you can go to Australia. Resources are resources and they’re somewhat independent. The story for Africa really revolves around the companies that supply resource support for the people that do the mining, for the communities that develop around the mining, the transportation, export etc. So that’s a second story.
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So, Africa is more than just a play on resources.Tourism is a big story. Consumer goods. The middle class has money to spend and you’re starting to see them do that. Agricultural products which is harder to do in Africa although you can buy a company like Illovo which is a sugar company, which is in several countries, although you can get companies actually in the processing of growing crops but its not that easy to actually do that.
And the other play I thought about is the consumer, the financial services and this is huge, in a big way …South Africa is the same way. Capitec for example is a bank doing these very kind of innovative banking the masses so to speak, figuring out ways to identify people that don’t have any identification, things of that nature.
Now the next thing is the middle class starts to evolve and you have more of an urbanization, people need services that they might not have worried about in the village for example life insurance, protection for your family, you’re now buying a house. What if you die, how do you get the loan paid off? Those things don’t matter when you’re on tribal land and you’re sharing the land with the village and you have all that infrastructure, but once you urbanize a population that group of people has demands very much like other developed country demands. So the financial services, whether it be insurance for their motorcycle …this huge need for financial services and those are somewhat the themes if you will as far as the investment themes.
Photo: Image courtesy Robert Scharar
As a practical matter, how can the average person invest in Africa?There are several ways to do that. People can use ADRs, there are several companies in Africa, there’s Bank of New York, which has a very robust site you can go to to look up individual companies that have ADRs. One of the advantages of those is that they are generally larger companies and you have some liquidity you don’t have to deal with foreign exchanges or for example if you buy a stock in South Africa you may have to pay a higher commission than you would be used to in the U.S. , they have transfer taxes on the purchases that you’re not used to as an American investor. The ADR simplifies that.
You can buy some of the exchange traded funds (ETFs) there are a couple that focus on Africa either South Africa or the broader market but those are going to tend to be only the large caps and often end up being resource companies or the big banks of things of that nature that make up a big part of the portfolio. So the question is how do you get beyond that and come up with other things to invest in?
We think a few of the themes right now and we’ve mentioned investor goods. There are several supermarket type chains in Africa. Many of them are based in South Africa but if you look many of them are expanding all over the continent. A good example of the consumer is look at Wal-Mart. Wal-Mart recently bought interest in a company called Massmart. Massmart in turn owns a series of retail stores, some of them called Game is some we’re familiar with, and Game is basically an appliance distribution store.
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But there has been major opposition to the Wal-Mart-Massmart merger. Are you concerned about governance risks?There was and that’s driven in part by South African unions and its kind of unfortunate because really I think that in many respects could help develop the marketplaces there. But I think it’s a good example of the fact that Wal-Mart sees this and they did get approvals, they have gone forward, and so I think it’s a big statement of the fact that they understand that consumerism is coming into play.
But there’s other ways to deal with it. There’s other companies that are going to compete with Massmart, a number of supermarket chains there in Southern Africa you can invest in. So we think those are good plays because, for example Zambia is developing its resources and is doing very well in terms of managing that process both economically and politically. The standard of living is going up in those communities and these companies are coming and opening stores and being very successful.
When I first started going to Africa 16 years ago in most places you went you would see nothing that was of a global nature. Now the global is good, you run into more global brands, global stores, global consumer goods that are being distributed there and there’s a lot of opportunity in that aspect of business.
What’s the one place that you would choose to invest in, in all of Africa?I’m very intrigued with Mozambique, it doesn’t have much of a developed market yet but I think it’s well positioned and as we are actually following things there. Zimbabwe will eventually no longer have a Mugabe around and I think it will open itself up and so that whole region can take off dramatically.
So as a practical matter the answer today has to be that most investors today would have a focus initially on a South Africa contact but I think really the successes are going to come in some of those other countries in the SADC region whether it be Tanzania or Mozambique or other countries of that sort and Zambia which I think really have the capacity.
I guess right now on a near-term basis we’re very interested in Zambia on a practical level being able to invest in it, followed by Tanzania.
Anything else our readers should know?
I’m a big proponent of a simple approach to investing which is called dollar averaging and I think in foreign markets with currency issues and other things that you really are better to do those investments over time. A lot of things can happen in the short term that can throw out or kill your investment strategy.
The other thing is that I think you avoid these developing markets at a risk to your overall portfolio in terms of stability and return, because they do not always act like a U.S. market. There’s all these discussions about co-relations going away, I was reading an article the other day about how growth and value tend to be more correlated. Well I will assure you that yes when there’s a calamity in the world everybody reacts somewhat to that, but there are things that drive some of these mid-seize and smaller companies overseas that are not totally globally related. And they will move up or down on factors independent. It maybe the local rainfall …And a lot of African countries have the ability to provide diversity against just the ho-hum of being in the U.S. market. And you will probably get a higher dividend yield. These countries understand investing from more value-oriented perspective that’s why the dividend yields are usually higher.
I think investors ought to consider the developing markets as an important part of their overall portfolio stability and risk adjustment. Second, I think they ought to be committed to do it over a longer period of time and not as a short-term trader, cause I don’t think that’s how you get there. I think you just sort of allocate something and do it over time to be in the market, and if you do, that you will be rewarded for doing that.