Foreigners pushing the limits in frontier Africa


Frontier African equity investment funds are still pulling in cash, but are running out of places to put it because many of the region’s markets are too small and illiquid, a top fund manger said.

The problem becomes particularly acute as funds grow and the required size of holdings swells, colliding with fund guidelines limiting exposure to any one company or country, said John Mackie, head of African investments at Stanlib in Johannesburg.

Consequently, there is an increasing tendency to include North Africa — essentially Egypt — in “African funds” despite the Arab-dominated region’s closer cultural affinity with the Middle East.

Frontier fund managers are also being forced to consider some exposure to South Africa, far and away the continent’s biggest economy yet a much more developed emerging market without the same growth potential as, say, Nigeria or Kenya.
“If you’re looking for pure African equity exposure, it’s getting tight,” said Mackie, who oversees four funds with assets totalling $300 million in Africa excluding South Africa for Stanlib, formed through the 2002 merger of Liberty Asset Management and Standard Bank’s asset management arm.
“We’re already bumping our heads in various places on that basis and we’re still getting strong inflows.”

With a population of 140 million — by far Africa’s biggest — a relatively liquid stock market and huge hydrocarbon deposits, Nigeria attracts most of the attention of the frontier investor looking for big long-term growth potential.

Main destination

Even there, however, any portfolio is likely to be dominated by banks, alongside a sprinkling of consumer-related stocks such as cement companies, brewers and mobile phone firms.

Beyond Nigeria, Kenya has always been the main African frontier investment destination, yet daily turnover on the Nairobi bourse can be as little as $2 million — less than Zambia and Zimbabwe.

With oil in the pipeline, Uganda and Ghana offer very steep economic growth trajectories, but with even smaller volumes of stock market trade are simply not an option for the sizeable outside investor, Mackie said.

Encouraging domestic pension funds to invest in local equities or lifting the limits on foreign ownership in medium-sized countries such as Tanzania might help ease the squeeze, but the prospects for speedy reform are slim.
“I really wish Tanzania were freer and bigger so we could operate there because we’re very keen for new opportunities,” Mackie said.

One major potential opening comes from Angola, which rivals Nigeria as the continent’s top oil producer and has several very large state utilities, headed by oil firm Sonangol.

However, investors have grown weary of hearing promises from the secretive government in Luanda of an imminent bourse launch.
“If there’s anything positive likely to be added to the liquidity pot in the next 12 to 18 months it can only come from Angola,” Mackie said.
“They’re talking up a storm about getting that exchange going, and I hope they do.”

Pic: South Africa’s currency- (Rand)