I’ve received lots of great feedback since the launch of my African Lions Fund. Today I wanted to take the time to respond to some of it.
One reader writes:
“I don’t doubt that demographics favors Africa. What I do doubt is that the risk/reward ratio for foreign investment in Africa is favorable. Please point me to some solid evidence for the current existence of any countries in Africa with rule of law, stable and business-friendly government, competent and reliable workers or managers, and majority belief in the right of private property ownership.
"… as an international investor, I don’t have time to wait in hope that these essential conditions may develop somewhere before I die.”
You don’t need to wait for these conditions to develop. There are many such countries already, with British common law legal systems, English as the language of business, respect for private property, peace, stability, and nominally democratic governments, and of course, stock exchanges. Stock exchanges that feature high-quality multinational companies with deep pools of qualified workers and managerial talent (more on this below).
Those are the ones I am interested in.
Kenya, Rwanda, Tanzania, Ghana, Botswana, Namibia, Mauritius, Malawi, and Zambia, would all make my list. Nigeria is going through a rough patch. But I believe it will come back. Some French-speaking countries in the West African Currency Union are also on my list; Senegal, for example.
Don’t take my word for it. You can check the rankings of African countries in various global indices on freedom and ease of doing business yourself.
Note, for example, that Mauritius ranks as the 13th easiest country (out of 190) in the The World Bank’s “Ease of Doing Business” survey.
The Heritage Foundation’s Index of Economic Freedom is another tool people use. There’s a great interactive heat map here.
Personally, I don’t place a whole lot of faith in such arbitrary measures dreamt up by people sitting in offices in Washington D.C. and Geneva. They can serve as a starting point. But, you really need to go and see things on the ground for yourself, which is precisely the value proposition I’m offering you.
Political differences are increasingly being sorted out peacefully at the ballot box in Africa as well. Earlier this year, Malawi held free elections in which the opposition prevailed, after a re-run. The constitutional court had earlier overturned the results of the 2019 election citing irregularities. A peaceful transition of power has now occurred.
Kenya’s last Presidential election in 2017 also resulted in a re-run after the initial result was not accepted by the public. In the end, President Uhuru Kenyatta prevailed again in the re-run. But the fact he agreed to it is, in itself, a sign of the maturity and progress of Kenyan democracy.
Even in the Democratic Republic of Congo, often considered one of the biggest basket-cases in Africa, things are improving. In 2019, President Tshisekedi became the first opposition leader to win the presidency since the country became independent more than 50 years ago.
However, the fact of the matter is, you don’t need “freedom” or “democracy” for economic development and rising stock markets. Some of the most successful economies in Asia are one-party states, or were ruled by strongmen for decades. (More below).
That did not stop some people making a fortune investing in Asian stock markets over the last 50 years.
I understand Africa isn’t for everyone. As our disclaimers say, we provide “General advice,” and we do not know each individual’s circumstances.
But the, “Africa is dangerous, corrupt and not governed by the rule of law” mantra which persists in the west is not a reason to dismiss investing in Africa out of hand, in my opinion.
If you want to explore the topic deeper, as it relates to Africa, there are many resources available online:
Indeed, as much of the world is becoming more populist, less democratic, and beating the drums of nationalism and isolationism, Africa is the clear exception. It is still moving towards more freedom, more democracy, more integration, and more dismantling of trade barriers.
African governments recently committed to a continent-wide free trade pact, for example. By some estimates it could collectively benefit Africa’s economies to the tune of $450bn.
If you are willing to spend some time reading about business and investment opportunities in Africa, I can recommend the following book, too:
But above all, what Africa offers is an antidote to the stagnation that I believe much of the world is going to experience over the coming decades.
Worldwide, when you look at those countries that are held up as the beacons of peace, stability and prosperity, they already reached the top of the mountain. They’re now ageing, shrinking societies.
There may be less risk investing in developed countries such as the UK, USA, Western Europe and Japan in a political, legal, and corporate governance sense.
But do they offer adequate returns? No they do not, in my opinion.
“Risk” also depends on the price you must pay for assets. High prices often equate to higher risks. That’s essentially the argument against buying high-fliers such as Google, Apple and Amazon. Their future is already priced for perfection.
Companies such as Intel, Cisco and Microsoft demonstrated that in a prior cycle.
You could have paid through the nose for them in 1999. They remained great companies, and their earnings grew by leaps and bounds over the next 20 years. But their share prices were laggards, because the price had already reflected all the future growth back in 1999.
In Africa, growth is not being accurately priced in, in my view. Also, there are some great companies.
In many African countries there are world-class companies that have been operating profitably and responsibly, as good corporate citizens, hiring and training many highly competent local managers and employees, for decades.
Many subsidiaries of multinationals operating in African countries are listed on the local stock exchanges. I’ve written before about my own current largest holding, Twiga Cement in Tanzania (part of the Heidelberg Group).
Nestle, Unilever, Cadbury, British American Tobacco, Rabobank, Standard Chartered, Stanbic, Vodafone, Orange, Diageo, Heineken, Anheuser-Busch-Inbev, WPP, Heidelberg Cement, Lafarge, Bata, and Coca Cola are just some of the examples of multinationals with locally-listed African subsidiaries that I can think of.
When you buy shares in these local multinational subsidiaries, you are partnering with global firms adhering to the highest standards of governance. And in Africa, they are really “on guard,” because they don’t want to be perceived as doing anything underhanded.
Many excellent local African groups are listed as well. I have written before about companies owned and operated by the Aga Khan Foundation for Economic Development. The Dangote group of companies in Nigeria, controlled by Africa’s richest entrepreneur, Aliko Dangote, is another example.
There is no shortage of high-quality businesses to invest in. Often, the valuations are but a fraction of comparable multinational subsidiaries or dominant business groups elsewhere in the world.
The growth prospects are also much stronger, due to Africa’s favourable demographics. That’s the attraction of the opportunity to me.
Bottom line: Nothing is without risk. Not even in the USA, Europe, and Japan. So, why pay through the nose for moribund companies there, where the productive population is shrinking, when you can pay much less for dynamic, growing businesses operating in Africa?
That’s why I seek to invest in the sorts of markets I do. As I put it on the Global Value Hunter website, I’m seeking to pick low-hanging fruit where few others are looking. (Usually due to their preconceived cognitive biases).
If everything is already perfect for investment, it’s hard to justify prices for assets being re-rated much higher. (The gravity defying FAANG stocks in the US perhaps excepted).
Going back to Asia, South Korea was a dictatorship until Park Chung Hee was assassinated. True democracy took two more decades to emerge. Thailand has had military rule for most of its existence after the absolute monarchy ended. Democracy in the Philippines is a circus. Marcos was one of the worst looters of a country in history. Most other Philippine presidents have been dogged by corruption scandals. Same in South Korea.
Indonesia was ruled by successive strongmen, Sukarno and Suharto, for decades. Vietnam remains Communist. China is a one-party state, though I hesitate to call it “Communist” any more.
Hong Kong has never been free or democratic. It was a colony ruled by British technocrats and has since been ruled by a local elite directly appointed by the Chinese Communist Party, who always have a guaranteed majority and select the Chief Executive. Hong Kong has, however, had good rule of law… up until now.
The Lee dynasty, or technocrats and political nominees appointed by them, have run Singapore since independence. It is virtually a one-party state in practice. In Africa, you might be interested to know, Rwanda is actively modelling itself on Singapore.
Malaysia has had the same ruling party in power since independence, except for the most recent couple of years when nonagenarian former Prime Minister Mahatir Mohamad quit that party (UMNO) and won the election for the opposition! And the country just witnessed the world’s biggest corruption trial.
However, NONE of that has stopped wealth being created and equity markets appreciating by thousands of percent in nearly every single Asian country I have mentioned above during my 25-year career.
“Democracy” and “rule of law,” while ideals that I would personally certainly be in favour of, are neither necessary, nor sufficient conditions for there to be investment opportunities that can succeed and be profitable.
Regarding our investment time-frame, the longer your available time frame, and the lower the price you pay, obviously the lower the risk of losing any of your capital.
My minimum time-frame on investments for the African Lions Fund is 5-10 years.
I believe nearly all my readers will have that sort of time, and hopefully much longer.
My mother is 70. Her father lived to 92. I would not discourage her from investing a modest amount in my fund on the basis of age. But, it would be entirely up to her!
Another reader looked at the benchmark index of African frontier markets stocks that I have chosen for the African Lions Fund to gauge whether my stock picks are adding value. He made the point that this index hasn’t really gone anywhere in ten years. He asked me what makes me think it’s going to do so now?
Regarding the historical performance of the chosen benchmark, having more than doubled between 2011 and 2014, it has been trending down since August 2014, except for a great year in 2017 when it saw a counter-trend rally in a bear market. All told, it’s now back 2% below where it was 10 years ago.
Do I have any reason to predict this trend is going to change in the near term? No. I am a traditional value investor. I am not in the business of predicting catalysts.
But as with anything, these markets tend to have liquidity cycles. Foreign money poured in, in the early part of the “noughties” decade. It has flowed out again in recent years, as the large global “Frontier Funds” marketed in the USA, mainly, went out of fashion and shrank dramatically. To cite one prominent example, the Morgan Stanley Frontier Markets Portfolio, which used to have over US$750 million under management, today manages only US$63.46 million, a drop of more than 90%.
I believe foreign money will flow back to Africa, however, as the longer-term factors I see working in many African countries’ favour become difficult to ignore. In future, more investment money will hopefully be allocated specifically to “Africa” and not to “Frontier” markets. That is my sense.
That said, specific catalysts do exist in some markets. In Tanzania for example, the Presidential election is at the end of October. President Magafuli will almost certainly be re-elected. But financial markets hate any sort of uncertainty, so in the lead up to the election investors are being cagey, and not very active. After the election, a “relief rally” of sorts is not out of the question.
Liquidity in the Tanzanian economy is actually better than most people’s perceptions right now, too. East African Breweries for example just reported +14% year on year volume growth in its Tanzanian beer business for the six months ended June 30. As I’ve written elsewhere, banks in Tanzania are enjoying loan growth that’s running at a double-digit annualised rate.
But for whatever reason, money is not finding its way into the stock market. I believe this will change. Government bond yields will likely also come down, and this will provide an impetus for the equity market to rally.
Another point I’d make is that African Lions Fund intends to invest only in companies with pristine balance sheets and, almost without exception, paying good dividend yields.
So, even if we find ourselves sitting around waiting for liquidity flows to return to the African frontier markets for a number of years, we should still make decent returns, from dividends alone. Valuations are now so bombed out – in low- to mid-single digits for many blue chip stocks on my watchlist – that it would be hard to image the stock prices falling much further from here.
Look, I know that for some of you the idea of investing your hard-earned money in the African stock markets I’ve identified is probably hard to get comfortable with.
But many experienced investors will tell you that the best investments are often those that make you feel uncomfortable, or would get you laughed at by some of your less adventurous peers.
I make no bones about it; I march to the beat of my own drum. More than one person has called me “iconoclastic.” I don’t fit the usual mould.
I’m just sharing with you what I’m increasingly doing with my own money. If you’re interested in joining me, the African Lions Fund is designed for that purpose.
But, there’s no obligation. Whether you invest in the fund or not, you can continue follow along here at Global Value Hunter.
One last point though, please don’t throw money at me in five years’ time if these markets have gone up by three or four-fold. The time to buy is NOW, not then.
I’m a buy low, sell high guy. Buying high and selling even higher can certainly work as well. But that’s not what I do.