"Get ahead of the investment pack." Less than two years ago, this teaser, slapped under a stock image of a male lion boasting a rather large mane and a contemplative stare, cropped up on billboards and black cabs across London. The garish pink and blue advertisements carrying the New Star logo offered investors access to the last untapped investment horizon - Africa - via a fund investing in the so-called 'heart' of the continent - sub-Saharan Africa minus South Africa.
That was October 2007 - then the credit crunch happened. The posters have subsequently disappeared while the fund - after suffering a loss of 30 per cent in its first year - has been wound up and sold off. Now, as confidence slowly returns to the market, investors are starting to re-engage with emerging market equities, but should they really be looking towards the so-called 'emerging, emerging' markets and venture into Africa - or will this be akin to stepping into a lion's den?
It’s risky, we all know that
To be fair, investors' disappointment in the New Star Heart of Africa Fund, cannot be blamed entirely on the ambitions of the confident 20-something, old Etonian fund manager Jamie Allsopp who, despite his age and experience, limited to managing UK equity funds, was given free rein by New Star founder, John Duffield, to run with the idea of a fund investing solely in African equities.
When New Star first suspended dealings in Heart of Africa, difficulties in buying and selling stocks on religious holidays in Nigeria and elections in Ghana were cited. Once it was announced that the fund would be sold, New Star put the blame on the low turnover of shares in the sub-Saharan African equity markets caused by the global credit crunch.
Ultimately, a culmination of problems led to the New Star fiasco, but the failure of the Heart of Africa Fund did illustrate that frontier markets were not as uncorrelated to the developed world as many initially believed.
Africa's crown jewels - commodities - are highly correlated to global economic confidence, and when demand for resources fell off a cliff the blow to exports and Africa's mines hurt.
Other than the realisation that Africa is not immune to the turmoil affecting the world's more developed markets, there are other caveats to investing in the continent: illiquid stock markets, corruption and political risk being some of the main concerns.
Peter Leger, co-manager of Coronation Fund Managers' Africa and Africa Frontiers Fund, adds currency risk to the list: "This is a significant issue as large moves in commodity prices such as oil and copper can bring pressure to bear on the balance of payments of countries.
"Market regulation is also an issue, and due caution and care must be applied before entering some of the markets. Investors should not have a short-term view when investing in Africa, as liquidity and transaction costs are bigger issues than most other markets."
But, opportunity knocks
While last year's fallout in commodities illustrated Africa's correlation to developed world demand, Ayo Salami, chief investment officer for the Duet Victoire Africa Index Fund, part of the Duet Group, which bought the New Star Heart of Africa Fund, believes those concentrating on Africa's natural resource wealth are looking in the wrong place.
Since taking over the assets of the Heart of Africa fund, which now forms part of the Duet Africa Opportunities Fund, an actively managed fund largely geared towards institutional investors looking for exposure to African equities, Mr Salami has focused on reconfiguring the original fund portfolio of 32 African companies - selling off holdings reliant on exports and buying into the more consumer-orientated stocks such as brewers, telecoms and cement companies.
"Consumption power in the world's advanced economies has been destroyed by the credit crunch - the same thing has not happened in Africa, which is still enjoying positive GDP growth on the back of robust domestic demand," says Mr Salami. He believes the consumption power of domestic consumers, driven by improved living standards and better implementation of the macro economic policies introduced in the late 1980s and early 1990s, is where the real African growth story lies.
Other factors playing in Africa's favour, according to Mr Leger, include a changing political landscape - he points to elections in Ghana as a "world-class example of democracy at work". In addition, the metrics of many African economies have fundamentally changed - the rise in commodity prices have enabled many to pay down their debt and, in stark contrast to the world's developed countries, Mr Leger says many countries in Africa have become "models of lending restraint".
BRIC in Africa
Another factor underpinning the investment story for Africa is the increase in foreign direct investment, which has ballooned six-fold in the eight years leading up to 2008. This investment has largely come from the world's BRIC (Brazil, Russia, India and China) economies and many expect the increased demand for raw materials in these countries to further fuel African growth.
China's rise has seen trade and political links between the country and African states like Angola strengthen at an escalating - and for many - alarming rate, as the Beast of the East's hunger for energy resources grows. While many have questioned China's intentions and the long-term impact of countries' mortgaging their natural resources for the much needed infrastructure investment, the rekindled love affair between China and Africa is not necessarily a negative.
According to research findings by STANLIB, the Johannesburg-based asset management operation of Standard Bank in South Africa, China's focus on infrastructure spending will do much to insulate Africa from the worst effects of the global recession.
John Mackie, head of African Funds at STANLIB, says: "The benefits of increased Sino-African commercial and diplomatic union are increasingly mutual. Indeed, the speed of China's engagement with Africa since the turn of the century underlines that China relies on Africa as much as Africa relies on China."
Mr Mackie believes that China's interest in Africa is far from cyclical. "If anything, China's diplomatic offensive has ratcheted up in 2009 so far, with a state visit by President Hu Jintao to Mali, Senegal, Tanzania and Mauritius. A telling contrast can be made with US president Barack Obama who, despite his African roots, will be in Africa only once this year - for a 12-hour stopover in Ghana."
The remaining BRIC countries' interest in Africa is not lagging far behind with Russia reported to have been showing interest in securing uranium supplies from Namibia - now the world's fourth largest producer of this vital element in the production of nuclear power.
India has set an objective to bring its own individual trade with Africa up to $150bn by 2013. While one of India's key priorities has been to diversify its oil supplies from Africa and away from the Middle East, Africa-India trade covers a broad range of technological and manufactured products, facilitated by Africa's sizeable population of Indian origin.
To date, Brazil's activity in Africa has been highly focused on the energy sector, in particular, bio-fuels, in which it has particular expertise - over 75 per cent of all new Brazilian cars now run on a mixture of petrol and bio-fuels.
Mr Mackie comments: "BRIC-African trade has increased from $16bn in 2000 to a staggering $157bn in 2008 - a compound annual growth rate of 33 per cent - demonstrating that this is no mere 'flash in the pan'."
But Mr Salami warns not to see investing in Africa as a play on growth in the BRIC countries. "Africa is not an option or a derivative on Chinese or Indian growth," he says. "The commodity boom has only been going for three to four years, whereas the macro economic growth story in Africa has been going for 14 years - since 1995 per capita GDP has been positive, exceeding population growth.
"Given that not a single country in Africa has had export-lead growth - understanding the dynamics of what's driving domestic consumption is much more important in analysing the long-term growth story of the continent."
