July-August 2013

AFRICA: If history repeats itself

AfricaAfricans, with their growing savings pools, could repeat previous investor trends in emerging markets and give asset managers a chance to capitalise, finds Fiona Rintoul. Selling investment products to Africans may be something many international fund managers have yet to consider, but those who know the continent well say there are opportunities. London-based Silk Invest, a specialist investor in Africa, the Middle East and Asia, gained its first African client last year – an Angolan institution – and has since signed a client from Mauritius and set up a local version of one of its funds in Morocco. In all cases, the target products are pan-African solutions. Zin Bekkali, Silk Invest’s chief executive officer, hopes to capitalise from a trend already seen by asset managers as they built business in other emerging markets. “Typically, in a lot of emerging markets, local investors become the biggest investors within their region over time,” says Bekkali. “We have seen a lot of instances of this cycle, for example, in Brazil, China, Turkey and Eastern Europe.” PLETHORA OF MARKETS
Eastern Europe perhaps provides the best comparison for Africa. Investors moved from bank accounts into funds that invested in their local market, then into regional funds. When they moved beyond Eastern Europe, they often preferred other high-returning emerging markets. The difference is that Africa, a continent of 55 very different countries, is more vast and complex than Eastern Europe. It is also hard to find any consistency of views on the plethora of markets in Africa and the prospects. “Even among African asset managers, there’s not a lot of consensus,” says Bekkali. This means it is not at all straightforward for local asset managers to begin investing outside their home market and into other African markets. Silk Invest is not the only company to see the opportunity that this presents. “We are starting to see some examples of asset managers targeting African institutions,” says Bekkali. “Increasingly, they feel it’s worth doing. We’ve also come across ETF [exchange-traded funds] business in different countries.” For those on the ground, such as South African asset manager Investec Asset Management, this is unsurprising. Investec manages approximately $5 billion (€4 billion) on behalf of clients in Botswana, Namibia, Nigeria, Lesotho and Swaziland. The assets are managed by an investment team that sits primarily in Cape Town and London, with some people on the ground in Windhoek and Gaborone. For Investec, the idea of African institutions diversifying their assets away from their home markets is nothing new. “Most of these clients are seeking opportunities not just in their domestic market, but globally, including across the African continent,” says Thabo Khojane, head of Africa client group at Investec Asset Management. “Our mandates typically include a broad range of assets and strategies.” Khojane also points out that many of the larger institutional investors in Africa are already in a position to seek out and find international managers. Naturally, the level of internationalisation varies from market to market, but it is a process that seems certain to gain momentum as financial assets in Africa increase. But is there much scope for them to increase? “Some developed countries have financial assets five to six times their GDP,” says Bekkali. “In Africa, the equivalent figure is 20%. The increase in financial assets will be big.” HEALTHY GROWTH
Savings pools are experiencing healthy growth across the continent, according to Khojane, though the fundamental drivers of growth vary. On the west coast, Ghana, Nigeria and Angola all have large growing economies plus relatively high income per capita. In East Africa, there is good economic growth in Uganda, Rwanda and Tanzania. There is a well developed financial sector in Kenya, and the East African Community (EAC) is serious about building strong links. In southern Africa, a number of governments set up retirement schemes for civil servants during the 1990s. These growing savings pools need to be put to work, and increasingly they are put to work in pan-African solutions. “In the old days, going international meant investing in US Treasuries and eurobonds,” says Bekkali. “Today, everyone understands that’s not a good solution. Investors are looking for regional options.” Meanwhile, the demand for quality in the African markets is as big as the potential for growth. As was sometimes the case in Eastern Europe, institutional investors in Africa are able to learn from mistakes and developments in the West and start at a better level. INTERNATIONAL STANDARDS
Local investment funds and pension funds are looking for services that meet international standards, according to Pascal Jacquemin, deputy head of international services for Société Générale Securities Services (SGSS). SGSS has a presence in Morocco and South Africa and covers Mauritius from its Johannesburg office. It recently opened in Tunisia and will shortly open in Ghana. “The clients insist on quality of service and investor protection,” says Jacquemin. At the same time, regulatory initiatives are being put in place in various African markets in order both to meet this demand for quality among local investors and to service the needs of the increasing number of international investors that are targeting Africa. These initiatives are supported by regional organisations, such as the Africa and Middle East Central Depositories Association (AMEDA), which SGSS recently joined as an associate member. Founded in 2005, AMEDA is a non-profit organisation that acts as a forum for information exchange to promote best practice in securities depository, clearing, settlement and risk management. It aims to support local markets in their efforts to adopt securities market regulations and to help them bring their operational standards and procedures into line with international standards and regulations. Other important initiatives include Casablanca Finance City (CFC), a financial hub designed to bring together national and international investors and provide a gateway to North and West Africa. This goes hand in hand with work to bring Moroccan legislation in line with French regulatory standards and formalises what Bekkali sees as one of five emerging blocs in Africa. The others are Southern Africa, Anglophone West Africa (Ghana, Nigeria), East Africa where the EAC provides a formal structure, and Egypt and countries to its south, such as Ethiopia. It’s all part of a rapid development of the African markets that should leave them better regulated and more open. At the moment, restrictions on overseas investment in some markets put a brake on change, but these are gradually being eased. In the meantime, resourceful African investors often find their own solutions. “Informal savings traditions such as chama [a kind of investment club] are allowing Kenyan investors at home and abroad to pool capital and buy shares in publicly traded firms,” says Cedric Muhammad, an economist at CM Cap. “Many families are finding it easier to accomplish this from New York City, Washington DC and Atlanta than from Nairobi.” BELIEVERS
A push-and-pull effect, whereby African investors are looking beyond their home markets and international investors are looking more to the African markets, is promoting growth and change across Africa. As the Bric markets – Brazil, Russia, India, China – move from emerging to emerged, certain African markets are moving from frontier to emerging. “Emerging markets funds are diversifying out of Brics,” says Jacquemin. “We are seeing the proportion of investment made in Africa growing year on year.” It is perhaps particularly interesting that SGSS chose to open in Tunisia last month. Many outside observers will see Tunisia as a country beset by political difficulties that exemplifies the turmoil that makes Africa a dangerous place to do business. However, Jacquemin takes a different view. There has been some drop-off in foreign investment in Morocco, Tunisia and Egypt as people wait to see what the final outcome of the Arab Spring will be, he says, but lobbying work to create better investment infrastructure in these countries continues behind the scenes. “We saw this in Ivory Coast in 2010. Even when there was a civil war, the market still tried to continue to function. People continued to work on improvement projects. When we announced our opening in Tunisia, we had 25 clients lining up to sign up with us.” In the end, it perhaps comes down to belief, and there is a growing number of believers. Those who wait for that which is perfect to come will surely miss the boat. To those based in Africa, certainly, the magnitude of the opportunity is obvious. ©2013 funds europe

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