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Risking an African adventure

Created:
14 May 2008
Updated:
15 May 2008
Written by:
Moira O'Neill

Africa and the Middle East may not be the first regions people think of when they decide to look for overseas exposure. But if you're seriously adventurous and have the stomach for frontier markets, you'll realise that it is those brave investors who are first in who stand to make the most money.

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Investors should take notice that Michael Spencer, one of the City's richest men and founder of inter-dealer broker Icap, is ploughing tens of millions into a new hedge fund investing in Africa and the Middle East amid a rush of money into the region.

There are two main reasons to invest in Africa, according to Kevin Colglazier, chief investment officer at Standard Asset Management. First, it is a frontier market where the best time to invest is at the beginning before the market is more developed. Second, African equity and currency markets are uncorrelated to what is going on in the rest of the world. While the Dow and Asian and European indices are highly correlated and move together with bad news, Africa is trading off its own issues.

The last frontier

"Africa is quite possibly the last emerging market in that there are few corners of the globe that investors aren't scouring for opportunities. It is the last stone to be turned over," he says.

Jamie Allsopp, manager of the New Star Heart of Africa Fund, adds a third reason: "Africa is at the heart of one of the most pressing subjects of modern times - the allocation of scarce resources."

"With its abundance of raw materials from coal to oil to metals the continent is becoming increasingly important both for developed and developing countries," he says. "The oil fields of Angola and the gold fields of Ghana are becoming increasingly important to a world that is adjusting to oil costing upwards of $100 a barrel and gold at $1,000 an ounce."

Importantly, the money gained from exporting commodities is enriching consumers, resulting in increased sales for domestic companies. Food companies, brewers, banks and mobile phone providers should all benefit from the increased spending power, according to Mr Allsopp.

Finally, the improving quality of management is giving investors opportunities, according to Amr Seif, portfolio manager of the Investec Middle East and North Africa fund. He says: "We are seeing more managers with capital discipline and responsibilities towards shareholders. Lots of graduates of western universities are returning home, for example the Ghanaian Harvard graduate is going back to Ghana, rather than staying in the US like they used to do.

"In Africa and the Middle East we estimate that there are 300 investable stocks to pick from. It is not difficult for a good fund manager to select 50-60 best-ideas stocks from that universe."

"Clearly the sub-Saharan markets are not without risks," says Mr Allsopp. "The unrest in Kenya highlights that the political background is still fragile relative to other parts of the world and a global recession is likely to lead to a softening in commodity prices. There is, however, tremendous momentum within the region's economic growth and with so much untapped potential, it is a region that rightly deserves to be discovered."

Mick Gilligan, director of fund research at independent financial adviser Killik & Co, is keen on the idea of investing in Africa and the Middle East and says his firm recommends that investors have 1-5 per cent exposure depending on their risk profile and time horizon.

Beware of minimum investment levels...

However, Mr Gilligan says one of the difficulties for UK private investors is accessing funds with the right structure and tax status. Investors with a few thousand pounds will find it difficult to gain access to investment opportunities in Africa and the Middle East as minimum investments are often very high for funds.

Also, most funds are offshore and don't have "distributor status". Offshore funds must distribute at least 85 per cent of their income to be granted distributor status in the UK. If they achieve this status, the income on the fund will be subject to income tax but when investors dispose of their holdings they will be subject to capital gains tax. But investors in funds without distributor status are subject to the higher burden of income tax when they eventually dispose of the fund.

With GDP forecast to grow 7.5 per cent a year between 2008 and 2012, the United Arab Emirates is one of the fastest growing economies in the world and Killik & Co believe that the region presents some great investment opportunities.

...and restrictions on foreign ownership

"Lots of groups have launched Middle East and sub-Saharan Africa funds but allocation is not in the sweet spots," says Mr Gilligan. "They tend to have investments in Israel, Turkey, South Africa, Egypt and Morocco, all countries that are relatively easy to access elsewhere.

"There is a problem with foreign ownership restrictions in lots of Gulf countries. Saudi is not open to foreign investors at all."

James Davies, head of investment research at independent financial adviser Chartwell is sceptical about the rash of recent Africa and Middle East fund launches. "I think this has some of the hallmarks of a fad," he says. "There has been some good recent performance. If you look at the stock markets of Saudi Arabia, Egypt and Iran, there is clearly a story there.

"How much of that is sustainable I'm not sure. There are enough opportunities in other emerging markets to miss out on Sub-Saharan Africa and the Middle East.

"I wouldn't be rushing out to buy an Africa or Middle East fund. New Star Heart of Africa is not really for me. It's an area that I'm prepared to miss out on - and forgo some of the upside."

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