Download Absa Africa Frontier Portfolio - Absa | Wealth And Investment

Wealth and Investment
Management
Absa Africa Frontier Portfolio
2 | Absa Africa Frontier Portfolio
From lost cause to hot prospect...
Over a decade ago The Economist dubbed Africa as
“The hopeless continent”. The publication lamented
that Africa was mired in poverty, disease, corruption
and market failure. However the past decade has
witnessed momentous change unfold across the
continent.
Africa is the world’s second largest and second most
populous continent after Asia. It accounts for about
15% of human population across the globe, with
an estimated 1.1 billion people. The continent also
controls roughly 10% of the world’s oil reserves and
40% of the world’s proven gold reserves. Despite this,
Africa contributes less than 3% of global GDPi.
Africa’s journey has been a tortuous one. The
scramble for African resources saw many countries
colonised, left war-torn and in economic strife. A large
dependency on the export of resources resulted
in inflated currencies, making imports cheaper.
Manufactured goods become more expensive as
currencies appreciated and become a less significant
contributor to GDP. This paradox, called Dutch
Disease was a pervasive characteristic of many
African economies.
At the turn of the millennium Africa’s GDP stood at
$600 billion. Today it is at an estimated to be $2.2
trillion. Adjusted for inflation, the African Development
Bank estimates Africa’s GDP has doubled in just 10
yearsii. Africa’s economic performance is indeed back
to the level it was in 2008 before the near collapse of
the Western banking system.
Year on Year GDP Growth %
GDP growth rates have averaged more than 5% over the past three years. Over the past decade, six of the world’s
top ten fastest growing economies featured African countries.
2009: Global financial crisis
2001: 9/11
Differential
World
Sub-Saharan Africa
Source: International Monetary Fund, World Economic Outlook Database, April 2013
Absa Africa Frontier Portfolio | 3
Populations are growing, but so too are
incomes
With more than half of Africa’s population is under
the age of 20, it is projected that within the next three
decades the continent will have a larger working-age
population than Chinaiii. Sub-Saharan Africa alone
will experience a 15 to 20% growth rate per decade
until 2040 in the number of young adults. Nigeria
for instance, has a population of 160 million people
– Lagos alone has more than 11 million. The UN
estimates that by 2050, Nigeria will be the fourth
most populous country in the world.
Possibly of greater economic significance is the rise
in Africa’s average per capita income. It is estimated
income per capita per household will rise above
$10,000 in the next 30 yearsiv. This not only reflects
the strong growth Africa has enjoyed in recent years,
but also points to the successful implementation
of economic and structural reforms over the past
decade.
Real GDP per capita
Ghana
Kenya
Nigeria
Zambia
Source: International Monetary Fund, World Economic Outlook Database, April 2013
Burgeoning consumer market
Africa’s population is young, fast growing and
urbanising. Africa also has more middle-class
households (i.e. households with incomes of $20 000
or above) than Indiav. By 2020, 11% of Africa’s
population is likely to be considered middle class,
which will spur growth in a range of consumer-related
sectors.
Trendy shopping malls have sprung up across Africa
as the continent’s mushrooming cities modernise
and its emergent middle class swells.
4 | Absa Africa Frontier Portfolio
From Lagos in the west to Nairobi in the east and
Lusaka in the south, increasing numbers of Africans
with more cash in their pockets are looking to shop
in modern centres rather than the small, rundown,
poorly-stocked, often informal stores that have been
the norm in the past.
Infrastructure – a precursor for growth
Africa’s infrastructure deficit is considered one of
the most significant barriers to sustaining its growth.
Furthermore, the continent has the most number of
landlocked countries across any continent. Given the
vast nature of the continent, it implies that Africa, on
average spends three times as much as developed
countries in getting goods to market.
However, there have been significant strides to
improve infrastructure over the past decade, and
these developments have added an estimated 1% to
GDP growth rate since 1990vi.
Kenya, together with neighbouring countries, which
includes South Sudan and Ethiopia, has launched
a $25 billion infrastructure development plan that
will effectively connect East Africa, as well as create
a better bridge between East and West Africa. The
project includes a new port hub, a railway line, a
highway, airports, a crude-oil pipeline and an oil
refinery, among other initiatives.
Chinese construction firms too, have rapidly involved
themselves in the development of infrastructure
across the continent, including the headquarters of
the African Union, in Addis Ababa, building a hospital
in Luanda, road construction between Lusaka,
Zambia’s capital, and Chirundu in the southeast;
stadiums in Sierra Leone and Benin; a sugar mill and
a sugarcane farm in Mali; and a water supply project
in Mauritania, among other projects.
Construction site, Ethiopia
Absa Africa Frontier Portfolio | 5
Not just a resource story…
Ghana
Kenya
• Widely regarded as a rapidly maturing African
democracy, with peaceful elections and transitions
of power since the multi-party system was
introduced in 1992.
• The peaceful outcome of Kenya’s presidential
elections in March 2013 bodes well for investor
confidence.
• A member of the Economic Community of West
African States, with a market of 25 million people.
• Agriculture accounts for approximately 30% of
Ghana’s GDP.
• Other key pillars of Ghana’s merchandise exports
are gold and cocoa, earning approximately 39%
and 23% of exports.
• Ghana’s domestic oil production should reduce
reliance on oil imports over the long term.
• Multilateral debt relief has reduced Ghana’s
external liabilities significantly, freeing up former
debt-servicing funds for pro-poor spending and
deepened developmental efforts.
• Domestic capital markets have deepened through
the issuance of longer-dated government bonds.
• Kenya’s broad-based economy reduces its
vulnerability to commodity price shocks and
augurs well for resilient growth. The largest
contributors to GDP are agriculture (24,6%),
transport and communications (14,5%), wholesale
and retail trade (12,6%) and manufacturing
(11,3%).
• Kenya will benefit from the increasing integration
of the East African Community, primarily through
growing intra-regional trade.
• Labour force is well educated and young. The
youthful structure of the population, with around
64% of the population currently aged 0-24 years,
will boost private consumption.
• Kenya’s economic strength and location on key
shipping routes to the Indian subcontinent make
it a suitable launching pad for firms looking to
expand into Africa. Kenya could attract more
significant foreign direct investment if it markets
itself appropriately.
Nigeria
Zambia
• IMF is forecasting average annual real GDP
growth of 7,8% over the next five years.
• Zambia has enjoyed political stability over most
of the last decade, with no major conflicts since
the late 1990s.
• A large population means an abundant supply
of cheap (albeit unskilled) labour and a growing
consumer market.
• Large oil reserves promise to remain a key driver
of liquidity.
• Economic policy has significantly improved, with
key macroeconomic indicators such as inflation,
real GDP growth, fiscal balance and current account
balance strengthening substantially since 2003.
• Taxation is relatively low; with VAT just 5%.
• Zambia has large metal reserves and strong
potential for growth in the mining industry. While
copper dominates the resources landscape, the
country boasts deposits of iron ore, coal, uranium
and manganese.
• Continued urbanisation should see a shift from
an agrarian to a manufacturing-based economy,
as cheap labour moves to manufacturing zones.
• The prevalence of copper has fuelled foreign
investment and strengthened the current account
in recent years.
• Corruption record is improving slowly: Nigeria’s
score with Transparency International has climbed
in recent years.
• The Chinese and Zambian governments are
investing heavily in physical infrastructure which,
over the course of the next few years, is likely to
significantly ease business operations in the country.
• Improving rankings for ease of doing business.
Source: International Monetary Fund, World Economic Outlook Database, April 2013
6 | Absa Africa Frontier Portfolio
Africa as an investment destination
As an investment destination, Africa exhibits the
typical characteristics associated with frontier markets
– geopolitical risks, high volatility, limited trading
information and illiquidity due to thinly traded
markets. Investing in frontier markets takes patience
as investors are often required to leave the comfort
of the institutional crowd, make decisions based on
asymmetric information and have the courage to
pay little attention to negative media hysteria, which
often plagues African news.
Furthermore, the continent has only 23 listed equity
markets, dominated by the Johannesburg Stock
Exchange, which accounts for 57% of the entire
market, followed by Egypt, Casablanca and Nigeria.
As a result, investing on individual stock exchanges
remains a challenge.
Absa Africa Frontier Portfolio
The Absa Africa Frontier Portfolio provides investors
with diversified equity exposure across Africa and
seeks to capitalise on investment opportunities that
are set to be unlocked by the projected growth on
the continent. The portfolio comprises best-of-breed
investment managers who have displayed consistent
performance and superior risk management in frontier
markets.
Investment features
Asset class
Equities
Risk profile
Aggressive
Nature of investment
Diversified portfolio of shares of companies domiciled in Africa or have the majority of their
assets and operations in Africa.
Underlying sectors
Including but not limited to: Financials, Consumer Discretionary and Staples, Industrial,
Telecommunications, Energy and Materials.
Investment term
A minimum of five (5) years
Liquidity
Quarterly
Minimum investment
$25 000
Fees and charges
Annual platform fees apply as well as underlying asset manager fees, where possible charging
of performance fees may apply. An annual charge is levied for portfolio management and
ongoing advice. A comprehensive breakdown of fees and charges is available upon request and
will be confirmed prior to or at the time of investment.
Absa Africa Frontier Portfolio | 7
Indicative geographical and sector
diversification
Geographical exposure of the Absa Africa Frontier Portfolio
Source: Old Mutual Investment Group, June 2013
8 | Absa Africa Frontier Portfolio
Fund manager selection process
Our manager selection process combines a qualitative approach with a rigorous underlying quantitative
screening process.
Quantitative
screening
Using unit trust and institutional databases, peer groups are created per asset
class. These peer groups are ranked according to a range of quantitative factors.
Key performance factors include skill, consistency and downside risk.
Qualitative
assessment
It is important to understand the investment manager’s philosophy. An in-depth
analysis consists of discussions with key decision makers, together with an
analysis of the company structure, investment team, investment process as well
as understanding the manager’s competitive advantage and examining their risk
management and control procedures.
Manager
selection
Due diligence materials are presented to the Investment Committee, where
consideration is given to both the ability of the manager, as determined by the
quantitative and qualitative assessments, as well as the overall blend of managers
within the portfolio. Voting is then undertaken by a quorum of members.
Ongoing
monitoring
Ongoing monitoring consists of analysis against specific performance objectives
and investment guidelines. The quantitative aspect involves ratio analysis,
performance attribution, peer group analysis and assessment of style bias. This
is complemented by the qualitative aspect, which involves regular manager
contact and a formal manager meeting in person, at least annually.
Fund selection criteria
Our fund managers were selected on the basis of:
• Investment team with proven experience and track
record in Africa
• Deep sector and country expertise
• Investment research with on-the-ground research
and extensive links to research houses and brokers
across Africa
• Strong fundamental research capability
• Physical presence in investment destinations
• Efficient entry into African markets at lowest cost
possible
• Portfolio liquidity
• Established deal-sourcing networks
Absa Africa Frontier Portfolio | 9
Sources and references
International Monetary Fund, 2011
i
African Development Bank, May 2013
ii
“Africa at work: Job creation and inclusive growth”, McKinsey & Company, October 2012
iii
Programme for Infrastructure and Development in Africa, African Union & NEPAD, January 2012
iv
“What’s driving Africa’s growth”, McKinsey & Company, June 2010
v
“Towards African Renaissance: Investment opportunities”, Frontline Capital Advisors Ltd, February 2013
vi
10 | Absa Africa Frontier Portfolio
Contact details
For more information, contact:
Wealth and Investment Management, Absa
Tel: +27 (0)11 562 0000
FAIS Act Notice and Disclaimer
This brochure/document/material/report/communication/commentary (“this commentary”) has been prepared by Absa Wealth, a division of Absa Bank Limited
(Registration No: 1986/004794/06) (“Absa Wealth”). Any reference to Absa Wealth includes its affiliates.
Absa Wealth has issued this commentary for information purposes only and you must not regard this as a prospectus for any security or financial product or transaction.
Absa Wealth does not expressly, tacitly or by implication represent, recommend or propose that the securities and/or financial or investment products or services (the
“Products”) referred to in this commentary are appropriate and/or suitable for your particular investment objectives or financial situation or needs. This commentary is not,
nor is it intended to be, advice as defined and/or contemplated in Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS”), or any other financial, investment,
trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever (“advice”). All the risks and significant issues related to or associated
with the Products are not disclosed and therefore, prior to investing or transacting, you should fully understand the Products and any risks and significant issues related to
or associated with them. This commentary is neither an offer to sell nor a solicitation of an offer to buy any of the Products, which shall always be subject to Absa Wealth’s
internal approvals and the execution of all requisite documentation between you and Absa Wealth.
You have to obtain your own advice prior to making any decision or taking any action based hereon and neither Absa Wealth, nor any affiliate, nor any of their respective
officers, directors, partners, or employees (in whose favour this constitutes a stipulation on behalf of another) accepts any liability whatsoever for any direct, indirect or
consequential damages or loss arising from any use of or reliance on this publication or its contents, and irrespective of whether or not you have obtained independent advice.
Should you be a consumer in terms of the Consumer Protection Act No 68 of 2008, as amended, (i.e. a natural person or an entity with an asset value and annual turnover
below R2m) then, the above provisions limit and exclude the liabilities which Absa Wealth will have towards you and also place obligations on you. Any South African person
or entity wishing to effect a transaction in any information discussed herein should do so only by contacting a representative of Absa Wealth in South Africa, 187 Rivonia Road,
east Block, 1st Floor, Morningside, Sandton, Johannesburg, 2196.
Absa Wealth A division of Absa Bank Limited Reg No 1986/004794/06 Authorised Financial Services Provider Reg No 523 Registered Credit Provider Reg No NCRCP7
Absa Africa Frontier Portfolio | 11
East Block, 1st Floor, 187 Rivonia Road • Tel: +27 (0)11 562 0000 • www.absawealth.com