Caution Over Europe Means Opportunity for Investing in Africa

Recently, global markets have been concerned over a Eurozone recession, and the health of the world’s Developed economies.  In particular, worries over debt levels in the European Union have led many investors to fear for the health of the monetary union and become wary about global growth.

Given concerns over slow economic growth rates in the US and Euro Zone as well as high leverage in these regions, we believe that investors are seeking to diversify their holdings into an increasingly globalized allocation.  In particular, many clients are looking for greater exposure to the expected centers of global growth in coming years, which means allocating more capital to emerging economies.  We believe it is important from a diversification standpoint to look beyond some of the most high profile emerging economies in order to truly participate in the broader sources of the world’s economic growth.

To that end, we believe that Africa's potential for strong, long term growth (both in terms of economic expansion, as well as increasing consumption) and low correlation to other global markets makes it a compelling investment allocation in a global portfolio.  In fact, the economic growth rates of many of Africa's nations are expected to be some of the highest in the world in coming years.  Trends such as demand for natural resources, infrastructure development, and an expanding consumer market are all likely to support Africa’s economic growth for years to come.  At the same time, Africa's twenty-four capital markets have generally demonstrated not only a low correlation of returns with other global exchanges, but also a low correlation between one another.  This means that adding Africa to a global portfolio has the potential to provide your clients with exposure to strong, low-correlated growth in the coming years.

We believe utilizing Nile’s Africa fund vehicle as part of a global portfolio is an excellent way to capture the opportunity which Africa presents.  Nile’s active strategy, which is is underpinned by our Portfolio Manager’s twenty years of experience and familiarity with investing in Africa, should provide us access to compelling opportunities across the Continent.  Nile’s expertise may prove to be an essential aspect to allow you and your clients to successfully navigate Africa’s capital markets.  Nile’s Portfolio Manager travels to Africa frequently to conduct research, and we maintain contact with a network of on the ground analysts who provide research and information about securities in which we may consider an investment.  In addition, we are a US registered investment adviser headquartered in New York City and believe that transparency is key in the current investment environment.

One key reason why Africa continues to be an excellent opportunity for investment is its low correlation to other global exchanges.  In fact, over the past few years the correlation has been low enough to compare to US stocks and US bonds.  Although in periods like we are currently experiencing, correlations across global markets tend to converge as investors pare risk globally in response to concern over weakness in the developed world.  Recently, Fidelity published an article which noted precisely how low this correlation had been over the past few years and demonstrates the opportunity for diversifying a portfolio through an investment in Africa. 

(The original draft of the Fidelity article can be found here: https://guidance.fidelity.com/viewpoints/africa-next-growth-story) 

However, although Africa’s exchanges may have seen weakness in recent months, we continue to feel that the Continent maintains a significant deal of independence from global business cycles.  For example, consumption patterns in Africa have continued to trend upwards, with expansion of the number of middle-income consumers continuing to drive growth.  While markets may in fact have fallen as a result of reduction of risk, this does not mean that the fundamentals of the companies that trade there are correlated to changes in global stock markets.  We believe the current weakness in global markets as an important opportunity to allocate funds to Africa, and the valuations of the firms in which we invest, which were already compelling, have become even better in our view.  

In addition, a good deal of the appeal of investing in Africa comes down to the potential which it provides for investors to diversify their allocations, and decrease the overall volatility of their portfolio.  If an investor chooses to put money in Africa, and Africa continues to demonstrate low correlation, this means that the overall volatility of the investor’s portfolio could actually go down, even while funds are allocated to a place which is traditionally considered more ‘frontier.’  In fact, we have actually found that adding an allocation to Africa in a portfolio comprised exclusively of the S&P 500 has led to an overall decrease in risk over time.  

Source: Bloomberg; African Data Includes South Africa, Nigeria, Kenya, Mauritius, Ghana, Egypt, Morocco, Botswana, through 12/2009.

Finally, we believe that concerns over currency fluctuations have weighed heavily in the minds of some investors in recent months.  We believe that the recent weakness in emerging market currencies has been driven by investors’ desire to decrease exposure to risk in the face of uncertainty over the situation in the Euro Zone.  Outflows from these currencies has driven many of them lower in the past few weeks, however we believe that over time the situation will re-adjust.  Over the longer term, we still believe that there is a trend towards appreciation of emerging market currencies against the US dollar.  In fact, we would argue that capital inflows and strong growth are an inevitable long-term result of Africa’s emerging consumer base.

Thus, we believe that now is an excellent time to consider capitalizing on global market weakness to invest in a region which will provide low correlation, strong economic growth, and a strong recovery.  

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com 

We know Africa: From Cairo to Capetown

Mobile Technology in Africa Continues to Make Rapid Inroads

In our discussion of investment opportunities in Africa, we at Nile Capital focus on three key themes around which we seek to invest.  One of these themes is the growth in infrastructure networks.  While this means that we seek opportunities in Africa’s growing physical infrastructure, this focus also extends to Africa’s growing digital infrastructure and mobile technology sector.  A recent article in the Wall Street Journal Technology blog helps explain why.  

As we have written in the past, the opportunity to invest in Africa’s growing consumption power is substantial.  Already Africa is a continent which contains over one billion people: put differently, about one out of every seven human beings currently lives in Africa.  Based on population growth rates, the continent’s population is expected to grow to over two billion by 2040, at which time approximately one in every four people on the globe will be African.  

In addition, Africa’s telecommunications land line network remains woefully inadequate.  In many countries where populations climb into the millions, the number of land line phones barely breaks five figures.  The challenge and prohibitive cost of maintaining a land-line network had for many years made it impossible for Africans to remain connected.

However, the introduction of cellular phone networks has caused a substantial shift in the landscape on the continent.  Whereas at the turn of the century cell phones were still relatively uncommon, market penetration over the past ten years has been profoundly rapid.  As we previously wrote:

Since the year 2000, McKinsey notes that 316 million new phone subscribers have signed up in Africa. However, they also note that in 2008 only 39% of Africa’s population had access to telecom services , 38% had access to modern retail, and 20% had access to banking (note that these statistics include South Africa, where the numbers are 92%, 68%, and 60% respectively, skewing the average up). It is amazing to think of the potential for growth in companies that are able to fill those gaps.

According to the Wall Street Journal’s Tech blog, cellular penetration across Africa has not only remained strong in the subsequent years, but it has actually overtaken Latin America as the world’s second largest cellular phone network, behind only the Asia-Pacific region.  According to the GSM Association (the global mobile phone operator’s body), Africa’s cell phone market has grown by more than 20% annually over the past five years, bringing the total number of subscribers above 649 million through the fourth quarter of 2011.  From 2007 through 2011, the number of cellular connections has more than doubled, rising from 283 million only five years ago.  In addition, the Association noted that it expects this number to rise to 735 million by the end of 2012.   

However, there remains a significant opportunity for further penetration in the cellular space.  While access has continued to improve, the Association also noted that 36% of individuals in Africa’s 25 largest markets remain without access to cellular phones.  In addition, 96% of phones are currently pre-paid, and data technology has only just begun to make inroads in the market.

Nile Capital, believes that there are a number of opportunities to participate in Africa’s growing mobile sector.   While this may mean participating in the growth of some of Africa’s largest telecommunications firms, it also means understanding how cell phones can change the landscape of communication.  For example, mobile banking is now making it possible for Africans who reside far from local branches to send and receive funds electronically, which helps to drive growth in retail bank deposits.  

While cellular communication in Africa becomes more prevalent and services improve, we seek to identify trends and opportunities to help our clients share in the growth.

To read the full report by the GSM Association, please visit here.

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com. 

We know Africa - from Cairo to Capetown.