In the hunt for high-yielding assets in Africa, investors may need caution in judging whether risks justify returns.
While sub-Saharan Africa has established its place as one of the world’s best long-term prospects -- the International Monetary Fund forecasts growth over 5.5 per cent next year -- some analysts and money managers question whether asset prices reflect all the dangers.
“The amount of money that is available to invest in the U.S. and Europe is too large in relation to the investable opportunities,” said David Cowan, Africa economist at Citi.
“The Africa story is being overhyped and at the moment the level of development is still not creating those investable opportunities,” he said at the recent Thomson Reuters Trading Africa conference in Cape Town.
Cowan pointed to yields on African Eurobonds -- in the case of Ghana’s 10-year bond down from 8.5 per cent at issue in 2007 to barely 6 per cent, and for Gabon, from 8.2 to 5.1 per cent.
He said he expected a yield of around 5 to 5.5 per cent for Nigeria’s imminent debut 10-year Eurobond, despite the risks in a sometimes unstable country heading for elections and reliant on oil exports from a particularly volatile region.
That is in line with the yield at which 10-year government bonds issued by Spain, the fourth-largest euro zone economy, were trading on Wednesday.
“We’re getting a lot of money flowing into Africa, but does it have the right perceptions of what rates of return it’s going to get?” Cowan said.
Yields on local currency debt have also fallen, to just over 3 per cent on one-year Kenyan paper, for example.
Meanwhile, Kenya’s stock exchange has made a dollar return of around 30 per cent this year and Nigeria’s nearly 20 per cent, with valuations helped higher by expectations of rising spending power from hundreds of millions of consumers.
According to Starmine SmartEstimates, Nigerian Breweries trades at a 12-month forward price-to-earnings ratio of well over 16, versus less than 12 for Dutch parent Heineken. East African Breweries is at a ratio of more than 18 against less than 14 for Diageo, which controls the Kenyan firm.
Fund trackers EPFR Global reported inflows to frontier African equity funds for 60 out of the 63 weeks to mid-November, taking in more new money than dedicated BRIC (Brazil, Russia, India, China) equity funds for 13 consecutive weeks.
“There are some wonderful things, but it is still a frontier,” said Alex Pestana, Investment Strategist at Sanlam Investment Management.
A decade of changes have made Africa visible to investors who would once not have looked.
More countries are holding elections -- if not always very good ones -- economic management has improved and debt-to-GDP ratios look healthier than in most Western countries. Asian investment and higher commodity prices have helped. So has new technology.
But for Africa to ensure a continued higher pace of growth may require additional reform as well as the steady throb of the Asian economic motor and continued population growth, one factor Africa can certainly count on.
“Infrastructure needs to change and education also needs to be looked at in a huge new way,” said Cowan.
For businesses, the return on direct investment in Africa is still higher than for any other part of the world, according to a McKinsey study published earlier this year.
“Normally you can get a return of about 30 per cent in Africa where normally people here (in the UK) manage to get only 2-3 per cent,” Nigerian cement-to-sugar billionaire Aliko Dangote told a Thomson Reuters event in London last week.
“There are tremendous opportunities in Africa.”
But competition is growing as new entrants seize those too.
Mobile telephones are a case in point. Companies such as South Africa’s MTN and local units of Vodafone suddenly face an aggressive Bharti Airtel since the Indian firm bought Zain’s African assets earlier this year.
Kenya’s Safaricom, part-owned by Britain’s Vodafone, is around 30 per cent off its 2010 peak since a local price war with Bharti began in mid-year.
While such competition may be good for consumers and the economy as a whole, it may not benefit shareholders as much.
“There are specific opportunities, but you have to be very selective. You can’t come to pick all and sundry,” said Geoffrey Odundo, managing director of Kenya’s Kingdom Securities, who is down on Safaricom. “People have to be more discriminating.”
Retail in Africa could be set for a shake-up too with Wal-Mart’s bid to take control of South Africa’s Massmart.