Investing in Africa – The Challenge of High Returns, Liquidity, Currency Risk and Corporate Governance

by Diana Buraka

Fund managers casting their eyes on hot African ventures. Investing in Africa is still seen as a risky venture, but the quest for higher returns and margins makes this continent attractive for global investors in the long-term. Double digit returns in fixed income investments in selected countries can be attractive in the current low interest rate environment and provide some diversification. Diana Buraka with a report from Fund Forum Africa 2016 in London.
A few years ago one would wonder ‘why’ investing in Africa, whereas now the question is ‘why not’. Considering the growing consumer demand and increasingly liberalised industries it is no surprise that Africa has become a popular destination for business investment.
dianaburaka_fund-forumafrica_15-16september2016_hiltoncanarywharfDiana Buraka, correspondent at FundForum Africa: “Investment in Africa is a very diverse topic. A broad range of views were presented at this year’s FundForum Africa conference. Talking to delegates, fund managers and analysts here it was interesting to see the difference in perspective. Investors and managers based in Africa come up with an assessment which is in contrast to the views of international investors. Overall, Africa is still a continent of opportunities. New technologies, FinTech and innovation in energy and telecom markets as well as financial services represent substantial growth potential.”

Liquidity is a challenge in Africa

But there are also enough reasons to be skeptical about Africa’s sunny growth prospects. Besides corruption, political and systemic risks the number of businesses that are big enough to attract large private equity funds is still limited.

Even when managers have found a promising deal, the owners are often reluctant to give up control. And those who managed to spot the right company and improve its performance within a few years after buying it, struggle to exit by means of an IPO listing due to low liquidity on local stock markets.

Institutional investors face challenges in Africa

For an institutional investor in particular it is very challenging to extract money out of the country or repatriate dividends. This represents a significant risk.

“The biggest fear is getting your money out. Nigeria has imposed capital controls. Egypt has followed a similar approach. If you are an institutional investor or if you are a fiduciary acting on behalf of the pension holders or other investors, you just cannot take such kind of lock up risk in a liquid market. It is just too irresponsible investment, and this is a huge barrier in two of the most liquid markets on the continent” said Adam Choppin, Manager Research – International Equities, Investment Strategy, at FIS Group, Inc at the Fund Forum Africa 2016.
fundforumafrica_15september2016

Sound institutional set-up is key for development

Albert Reiter, CEO of e-fundresearch.com and investRFP.com who chaired a high-profile panel at FundForum Africa this year adds: “The institutional set-up in a number of countries is already well developed but the track-record of good governance is still short”. Olusegun Omoniwa, Head of Managed Investments at the Wealth Management Unit of Standard Chartered in Nigeria confirms that there would be a good basis for development of strong local institutional markets: “The pension system in Nigeria is very similar to the one in Chile. Strong domestic institutions and a developed framework could stabilize markets in times of crisis.”

Investors evaluate Frontier Markets in the search for yield

“Talking to institutional bond investors this week I hear that more and more investors start looking at frontier markets also in the search for yield. In the fixed income markets it makes sense to add a few percentage points of double-digit coupons in currencies which have under-performed recently”, explains Albert Reiter from e-fundresearch.com.

The brave will take the risk

Besides the currency risks and plummeting commodity prices, political unrests have lowered the appetite of the more risk-averse fund managers. This may bring down the price tags of the overvalued companies and open up new opportunities for those who are brave enough to take the risk.

“The policies of the Zuma government in South Africa had a negative impact on growth but they’ve been unlucky with the economic cycle also. Both things happened at the same time and that’s a rough cocktail to overcome. I don’t see either of those things changing in the next year” added Adam Choppin by FIS Group, Inc.

More upside on the horizon

Despite some caution there was a rather optimistic outlook on investing in Africa during panel discussions at the FundForum Africa 2016. Stephan Breban, Investment Consultant at RisCura reminded that the biggest headwind for investments in Africa remains to be the misperception and a lack of knowledge also.

“The people will tell you about the oil price collapse, about the political instability, the currency instability, but the reality is, that the number one headwind for in Africa is misperception. People tell you that Africa is failing, but every problem you see is not unique and it was just repeated again. Probably the answer has already been found somewhere.”

Entrepreneurship is Africa’s biggest asset

South Africa is still an important power-house in Africa and home to very dynamic companies and entrepreneurs. With the right policies the country could return to growth. Although the current climate is rather defensive and there is talk about rating downgrades there is also reason to be optimistic.

Albert Reiter: “The most recent elections resulted in some surprises for a number of market participants. Herman Mashaba, the new mayor of Johannesburg who made his money as an entrepreneur in the hair-care business, was offered this job by the Democratic Alliance. He is one of the people to watch as he governs and manages a city of 5 million people – close to 10 percent of the country’s population. If he succeeds it would be very promising for the future of the whole country. He is definitely one to take up the challenge.”

Diana Buraka
Correspondent, London
e-fundresearch.com

London Metal Exchange – insider tour – HSG Alumni London

Diana Buraka – London HSG Alumni Board Member – LME Visit

London Metal Exchange opens its doors for HSG (University of St.Gallen) Alumni

Our HSG London Alumni team has been looking into day-to-day trading at the London Metal Exchange. Diana Buraka (second left) met one of our HSG Alumni board members, Marko Kusigerski (first left), who works at the LME and shares his experiences at the oldest open-outcry Metal Exchange.

We got a unique insight into the essential processes at the London Metal Exchange from a privileged insider tour by one of our Alumni members.

For all those new to this subject, London Metal Exchange is the largest market in the world in metal options and futures, and it is central to official price setting. It is also, the only remaining ‘old fashioned’ exchange that still practices the ‘open-outcry’ way of trading. Each metal listed on the LME is traded individually in a short five-minute ring trading session and its outcome determines the official price worldwide! In 2012 LME was sold to Hong Exchange for £1.4 billion and currently it is looking into further expansion in China.

To our great fascination, we observed life trading sessions for zinc, copper and aluminum. The tactics of the ring trading resembled a heated parliamentary debate between the MPs, where ten exclusive members of ring were shouting out their last moment bid, accompanied by some energetic coded gestures that would outdo any fierce debate of two gesticulating Italians. The highlight of the short five-minute trading session for aluminum was at the very last minute, since every member hopes to get the last bid advantage. The whole process looks quite archaic and it hasn’t changed for the last hundred years. The ring proclaims the rule of gentleman, which means, styling yourself to something more extravagant than a conservative dark suit and tie will result in a hefty fine. During the ring session traders aren’t permitted to access any digital devises like phones or even digital watches, so, the only arsenal they have to their means is pen and paper, which brings me to memories of my final exam at the university of St. Gallen.  Don’t get me wrong, not all of them are Swiss, but most of them are wearing Swiss watch, that they tune every morning to the perfect clock hanging above the trading ring. This obsession with the time-precision is beyond my time-management comprehension, but for the traders it is second nature, since every second can result into a ‘rugs to riches’ story. Pursuing a career of a trader and becoming familiar with the secret coded gestures and verbal messages is something that one starts from infanthood. Sadly, I missed my chance…

Eventually the bell marked the end of the official morning session and the heated activity in the ring diffused in a matter of seconds. We caught ourselves still holding our breath for the last five-minutes following the intensity of the trading battle. When the spectacular show was over, we made a group photo with relatively relaxed faces. It was time to thank Marko for an insightful tour at the LME and return to our offices.

 

 

 

Rolls-Royce experience in the world of the Russian Art

Hosting a private evening for Rolls-Royce at Sotheby’s Auction House in London. Rolls-Royce experience in the world of the Russian Art including works of Konstantin Makovsky, Boris Kustodiev and Ilya Mashkov. To support the idea of the Russian Socialist Realism movement, I joined the numbers of Russian women depicted in RED ;-). Though, unlike the Socialist Realism artists, glorifying the working class, today I celebrate the true Perl of the Capitalism in its purest form and the decadence of the Russian Elite in the name of the most luxurious brand of the century! J

Diana Buraka: Hosting Rolls-Royce event at Sotheby's

Diana Buraka: Hosting Rolls-Royce event at Sotheby’s

Russian Art

 

Fund Forum International 2013

Off to Zurich for the Rothschild Investors Summer Academy this Thursday. Next week exploring the latest on financial markets at the Fund Forum International 2013 in Monaco.