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This podcast is brought to you by Absa, a member of Barclays. Biznews’ Alec Hogg is at the Absa Investment Conference with Deslin Naidoo, who is with Alexander Forbes. Talking about Africa, opportunities in Africa – how things are changing in Africa? Why should we remain Afro-optimists and do you still believe in the African Story?
Africa represents many different things, depending on the type of investor you are, so if you’re a corporate, the opportunities set to extend your earnings by the whole story of consumerism and the growth in Africa is a very, very compelling story. If you’re an investor with discretionary money, of course if there’s earnings for corporates that’s meant to translate into investment returns for them, but if you’re a Pension Fund investor – that’s where the waters tend to get quite murky because if you’re sitting with a liability or a perceived liability, so DB Funds have explicit for liabilities. Define contribution funds tend to have proxy liabilities – what you need to replace your income on retirement. So your process tends to start with a natural real perspective of matching these liabilities, and including Africa, in that kind of long-term framework is extremely difficult.
But why would it be? I’ll tell you where I’m going with this. With the search for better returns around the world, investors, from all over the world, are looking at areas maybe they wouldn’t in the past, Africa Rising – Africa growing more rapidly, in theory, it makes so much sense to go there, because you get better returns.
It does. It is just who is making the decision to get into Africa, so the board of trustees actually make the decision but at which point do they get the advice to do that? So is an actuary equipped in an asset liability exercise to determine the long-terms strategic value of Africa? What is that risk premium because Africa is a region? That’s the first thing.
Fifty-four countries yes.
Yes, it’s a region and it’s a diverse region, and when you do a Pension Fund exercise, you talk about assets, so you first have to figure out what represents an asset for Africa. The complexity lies in that choice and the complexity lies in how does that asst translate into the risk, to match a liability?
This is real, complicated stuff but just getting down to real basics. Afro-optimism remains, despite the fact that oil is 60% of Africa’s exports, and that has halved in value. We’ve seen Nestlé change its mind, very rapidly. I don’t know if you picked that up but they’re retrenching 15% of their African staff, and they were a cheerleader. We see the Nigerians saying, “What are we going to do without all the oil revenues?” Is it a temporary thing or is there a bigger play, a bigger wave at play here that will overcome this setback?
It’s a long-term play. I think when corporates enter these markets they sometimes misread what you’re doing, so with Africa you’d note, that we are coming from such a low base that the development off a middle-class, even if it is a very fine sliver, can material change the fortunes of Africa. Now, it’s a question of how do we develop that particular framework.
I think listed companies are trying to apply listed, sort of corporate mindsets, on how they want to harness this, but I don’t think Africa is, necessarily ready for a full on corporate strategy to come in because there is so many issues there. There are logistic issues. There are regulatory and legal issues. You’d need, I think the Africa Story is about companies in Africa developing within the region, so you’d want a Kenyan company to create the Kenyan Story or a Nigerian company.
Or a South African company, like MTN, but why is it that MTN has been so successful, and Tiger Brands has been unsuccessful? Is that playing to what you were saying a moment ago?
I think part of that success story lies in a critical opportunity. We know mining is there. Our mining companies have always been there. Agriculture is probably one of the areas, but China, I think, has got their eye on the agriculture side. Telephony and mobility is one of those catalysts that unlock Africa. I mean education being a very, very big one. The more you educate people the more they are able to take care of themselves.
The other big story about investing in Africa is not the corporate story. It’s the infrastructure story, so the infrastructure story tends to give a lot of stable returns because your Governments in Africa tend to guarantee those kinds of projects. It’s sort of the way, I think in a very bad way, the Sand Rain Story in South Africa. It is high risk. The Government comes in and you sort of get a comfort, despite the risk around it but it’s the infrastructure that needs to come first – if you don’t have trucks on the road, companies like Nestlé are just not going to get anything anywhere. Trucks on the road breed – it’s the blood of any country or continent. The U.S. knew it, when they put the railroads out there, so I think that’s the challenge.
The infrastructure challenge, to me, corporates needs and telephony doesn’t need that, so when you’re talking about MTN, they were putting in the infrastructure. That was probably the big thing.
So where’s the play? If you’re an investor and you’re wanting to get a slice of this market, this billion people that are at such a low base that there really is only one way – how do you play it?
Okay, let’s look at it from an individual’s perspective. I think individuals who have discretionary money and do not have needs to draw down on that money immediately. They can make a play into Africa – it’s a 20-years story.
A 20-year story, okay, so you we say you don’t own shares for anything less than five years, just normal equities. If you want to invest in Africa – take a 20-year view.
Correct. There is too much volatility. There’s too much noise, too much of instability. I think you do want a diversified strategy. You want to put it away. You’d probably want to save it for your kid, and you want to see what comes out at the other end, so if you look at the old way of retirement planning, etcetera. You’d split your asset base into what your needs are? What your discretionary spend it? Then what are you desires? The next step is what your legacy and philanthropic needs, so if you’ve got money to look at the last block, which is almost sitting towards a high net worth type of investments. Africa is a good play. It is going to be like South East Asia. Someone is going to emerge as a tiger or maybe the elephant, in the case of Africa.
Through ETFs?
You see, I don’t think ETFs is, potentially the right strategy right now, because the exchanges in Africa are not necessarily reflecting the opportunities set in Africa. A lot of the Pension Fund money that exists in those countries are already invested in there, so the risk premier and the liquidity premier and all of those elements that unlock value, are probably, already priced in. So you’re going to get a weaker return in there.
One for a South African to do it, is to look at those South African companies with expending opportunities that they’re going after, in Africa, and another one is, again, there are lots of private equity funds that are made available out there. I think use that. Use the unlisted and alternate space. It’s a growing space that’s emerging in South Africa, and with the help of a financial advisor, you’d be able to allocate the right kind of money to it.
Deslin Naidoo is with Alexander Forbes. This podcast was brought to you by Absa, a member of Barclays.
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