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Monday, November 26, 2007.


By Ceri Jones


These are exciting times in Africa. In many countries across the continent, investors can still get in at ground level, but preconceptions and prejudices are hard to overcome. Think of Africa and you'll likely think of Aids and Darfur. Instead, says Roelof Horne who manages the African fund at Investec, you should be thinking about an entrepreneurial people who are making enormous strides in economic growth.

"A lot of negative news comes out of Africa and because it is a big continent, commentators tend to tar it all with the one brush," says Horne. "There is this impression that Africa is struggling but in reality it is improving rapidly every year.


No matter what macro-economic numbers you look at, development is astounding. The continent no-one wants to touch is growing at a rate of 6% pa and that is sustainable for the medium-term. Its people are naturally entrepreneurial. Everywhere I go I'm amazed at what has been achieved with so little."

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The furious progress is not just a consequence of the continent's natural resources. While oil exporting countries are having a royal time of it, there are 54 countries and only six export oil, and the non-oil story is also compelling, Horne says.


Virtuous cycle


Demand for African resources from the rapidly growing Asian economies is driving up asset prices and boosting general confidence, which in turn encourages foreign investment.


But an additional raft of developments are also pulling in the right direction, such as improving political stability; increasing deregulation and privatisation, particularly in Tanzania and Kenya; and a debt burden that has fallen from more than 100% to around 20% of gross domestic product since 2005. Like China and other emerging Asian economies, strong growth in income per capita is producing a virtuous cycle in demand for manufactured goods which in turn spurs job creation.

Drawbacks include the small scale of many sub-Saharan markets with low trading volumes and liquidity. Only 50 stocks in the sub-Saharan ex-South African markets have a market cap of £250 million, while some markets have only a handful of stocks listed at all. Algeria has just three, for example.

However, one perception that is overly-exaggerated is the extent of conflict in the region. There are fewer hotspots - just the Sudan, Somalia and the small Central African Republic, while peace is now shifting the focus to trade in the Democratic Republic of Congo, northern Uganda and southern Sudan. Today 60% of countries have multi-party democracies, whereas 20 years ago democratic elections that commanded public confidence were scarce.

Distrust of foreigners and privatisation are slowly being shrugged off. Whether South Africa's hosting of the World Cup in 2010 will change that could be interesting.


Financial services


One sector where greater confidence is transforming the market is financial services. A decade ago, banking in the region amounted to taking deposits from the masses and putting it into a fixed interest account. Hardly anyone could get a home loan.


That is changing and, over the last three years, banks across Africa have put huge effort into developing products for a broader market, particularly in consumer lending. In this virtuous circle, as the workforce becomes creditworthy, they are eligible for bank loans in turn empower them.

Some of the biggest banks across the region are the Morrocan-listed Attijariwafa Bank (BCM), Soc. Nationale Morocco D'Investissement (SNI), Banque Marocaine Com. Morocco Exterieur (BCE) and Banque Centrale Populaire (BCP) in Morocco, and, in Nigeria, First Bank Nigeria (FBNBK), Zenith Bank International (ZEN), Union Bank Nigeria (UBNBK), Intercontinental Bank (INTCON) and United Bank for Africa (UBABK) in Nigeria. Bad debt problems are scarce because African central banks impose a strict regulatory environment and provisioning rules.

The Egyptian financial sector has been transforming itself even more than other nations, thanks to the Government's recent moratorium on property ownership and a reduction in the stamp duty on property transactions to a flat rate of just 300 Egyptian pounds (around $600).


Historically, property often changed hands without being properly registered to avoid payment of a penal 12% stamp duty on property transactions, and this has created pent-up demand for property purchase and mortgage lending. The biggest players in this region are National Societe Generale Egypt Bank (NTSG), Bank Of Alexandria (BKAX) and Commercial International Bank (CMIB).


Mobile phone penetration


Mobile telephony has taken off at a surprising rate given the relative poverty. Nearly one third of Africans have a mobile - that's some 300 million people. The mobile is a huge enabler in a country where only 4% of the population has access to a landline.

"Until quite recently you had to get in a car even if you just wanted to speak with someone 10km away if you wanted to talk business," points out Horne. "Just imagine how a mobile unlocks the life of a small entrepreneur on the continent."

Three of the most liquid operators in this segment are all Egypt-based - Telecom Egypt (TELE), Vodafone Egypt (VOD) and Mobinil-Egyptian Company for Mobile Services (EMPN). Demand for building materials is mammoth in a region that is building its infrastructure from almost scratch.


Companies that are riding this boom include West Africa Portland Cement (WAPCO) in Nigeria and - in Egypt - El Ezz Aldekhela Steel (ALFS), Suez Cement Egypt (SZCT) and Egyptian Iron and Steel Company (EISC).


Kenyan stockmarket in focus


While Morocco topped last year's world stockmarket performance league, Kenya is the focus in 2007. The main NSE index rose 60% last year as 15 billion shillings of new money poured into the market. Over the last five years, the index has rocketed 787% in dollar terms, according to Standard & Poor's, making it one of the world's best-performing markets.

The success of new listings has created nearly a million Kenyan shareholders, according to The Kenya Association of Stockbrokers, many thousands of whom first forayed into the markets when KenGen, the state's biggest electricity company, was listed last year, along with Eveready, the battery maker, and Scanad, an advertising company.

Several companies have moved their main stockmarket listings to London such as Brewer
SABMiller (SAB), which has a quarter of its interests in South Africa, Anglo American (AAL), which has a fifth of its business in Africa, and Old Mutual (OML), which has three quarters of its business in Africa.

Investec's Guernsey-based fund is focused on high net worth investors who can afford its $1 million minimum but the manager expects to launch a retail fund in the UK within a few months. The
New Star Heart of Africa fund offers exposure to sub-Saharan Africa excluding South Africa.

Amongst global emerging market funds, the level of exposure to Africa varies tremendously.
Aberdeen's Emerging Markets fund is 6.2% invested in South Africa compared with Lazard's Emerging Markets fund, which has exposure of 17%. The Old Mutual South Africa Investment trust historically performed well, but was wound up in February this year.


Main picture: The Nigerian Stock Exchange, Broad Street, Lagos, Nigeria.


With thanks to Interactive Investors, where this piece first appeared.


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