Absa Africa Frontier Portfolio. Wealth and Investment Management

Transcription

1 Absa Africa Frontier Portfolio Wealth and Investment Management

2 2 Absa Africa Frontier Portfolio

3 From lost cause to hot prospect... Over a decade ago The Economist dubbed Africa as The hopeless continent. The publication lamented that Africa was mired in poverty, disease, corruption and market failure. However the past decade has witnessed momentous change unfold across the continent. Africa is the world s second largest and second most populous continent after Asia. It accounts for about 15% of human population across the globe, with an estimated 1.1 billion people. The continent also controls roughly 10% of the world s oil reserves and 40% of the world s proven gold reserves. Despite this, Africa contributes less than 3% of global GDP i. Africa s journey has been a tortuous one. The scramble for African resources saw many countries colonised, left war-torn and in economic strife. A large dependency on the export of resources resulted in inflated currencies, making imports cheaper. Manufactured goods become more expensive as currencies appreciated and become a less significant contributor to GDP. This paradox, called Dutch Disease was a pervasive characteristic of many African economies. At the turn of the millennium Africa s GDP stood at $600 billion. Today it is at an estimated to be $2.2 trillion. Adjusted for inflation, the African Development Bank estimates Africa s GDP has doubled in just 10 years ii. Africa s economic performance is indeed back to the level it was in 2008 before the near collapse of the Western banking system. Year on Year GDP Growth % GDP growth rates have averaged more than 5% over the past three years. Over the past decade, six of the world s top ten fastest growing economies featured African countries. 2009: Global financial crisis 2001: 9/11 Differential World Sub-Saharan Africa Source: International Monetary Fund, World Economic Outlook Database, April 2013 Absa Africa Frontier Portfolio 3

4 Populations are growing, but so too are incomes With more than half of Africa s population is under the age of 20, it is projected that within the next three decades the continent will have a larger working-age population than China iii. Sub-Saharan Africa alone will experience a 15 to 20% growth rate per decade until 2040 in the number of young adults. Nigeria for instance, has a population of 160 million people Lagos alone has more than 11 million. The UN estimates that by 2050, Nigeria will be the fourth most populous country in the world. Possibly of greater economic significance is the rise in Africa s average per capita income. It is estimated income per capita per household will rise above $10,000 in the next 30 years iv. This not only reflects the strong growth Africa has enjoyed in recent years, but also points to the successful implementation of economic and structural reforms over the past decade. Real GDP per capita Ghana Kenya Nigeria Zambia Source: International Monetary Fund, World Economic Outlook Database, April 2013 Burgeoning consumer market Africa s population is young, fast growing and urbanising. Africa also has more middle-class households (i.e. households with incomes of $ or above) than India v. By 2020, 11% of Africa s population is likely to be considered middle class, which will spur growth in a range of consumer-related sectors. From Lagos in the west to Nairobi in the east and Lusaka in the south, increasing numbers of Africans with more cash in their pockets are looking to shop in modern centres rather than the small, rundown, poorly-stocked, often informal stores that have been the norm in the past. Trendy shopping malls have sprung up across Africa as the continent s mushrooming cities modernise and its emergent middle class swells. 4 Absa Africa Frontier Portfolio

5 Infrastructure a precursor for growth Africa s infrastructure deficit is considered one of the most significant barriers to sustaining its growth. Furthermore, the continent has the most number of landlocked countries across any continent. Given the vast nature of the continent, it implies that Africa, on average spends three times as much as developed countries in getting goods to market. However, there have been significant strides to improve infrastructure over the past decade, and these developments have added an estimated 1% to GDP growth rate since 1990 vi. Kenya, together with neighbouring countries, which includes South Sudan and Ethiopia, has launched a $25 billion infrastructure development plan that will effectively connect East Africa, as well as create a better bridge between East and West Africa. The project includes a new port hub, a railway line, a highway, airports, a crude-oil pipeline and an oil refinery, among other initiatives. Chinese construction firms too, have rapidly involved themselves in the development of infrastructure across the continent, including the headquarters of the African Union, in Addis Ababa, building a hospital in Luanda, road construction between Lusaka, Zambia s capital, and Chirundu in the southeast; stadiums in Sierra Leone and Benin; a sugar mill and a sugarcane farm in Mali; and a water supply project in Mauritania, among other projects. Construction site, Ethiopia Absa Africa Frontier Portfolio 5

6 Not just a resource story Ghana Widely regarded as a rapidly maturing African democracy, with peaceful elections and transitions of power since the multi-party system was introduced in A member of the Economic Community of West African States, with a market of 25 million people. Agriculture accounts for approximately 30% of Ghana s GDP. Other key pillars of Ghana s merchandise exports are gold and cocoa, earning approximately 39% and 23% of exports. Ghana s domestic oil production should reduce reliance on oil imports over the long term. Multilateral debt relief has reduced Ghana s external liabilities significantly, freeing up former debt-servicing funds for pro-poor spending and deepened developmental efforts. Domestic capital markets have deepened through the issuance of longer-dated government bonds. Kenya The peaceful outcome of Kenya s presidential elections in March 2013 bodes well for investor confidence. Kenya s broad-based economy reduces its vulnerability to commodity price shocks and augurs well for resilient growth. The largest contributors to GDP are agriculture (24,6%), transport and communications (14,5%), wholesale and retail trade (12,6%) and manufacturing (11,3%). Kenya will benefit from the increasing integration of the East African Community, primarily through growing intra-regional trade. Labour force is well educated and young. The youthful structure of the population, with around 64% of the population currently aged 0-24 years, will boost private consumption. Kenya s economic strength and location on key shipping routes to the Indian subcontinent make it a suitable launching pad for firms looking to expand into Africa. Kenya could attract more significant foreign direct investment if it markets itself appropriately. Nigeria IMF is forecasting average annual real GDP growth of 7,8% over the next five years. A large population means an abundant supply of cheap (albeit unskilled) labour and a growing consumer market. Large oil reserves promise to remain a key driver of liquidity. Corruption record is improving slowly: Nigeria s score with Transparency International has climbed in recent years. Taxation is relatively low; with VAT just 5%. Continued urbanisation should see a shift from an agrarian to a manufacturing-based economy, as cheap labour moves to manufacturing zones. Zambia Zambia has enjoyed political stability over most of the last decade, with no major conflicts since the late 1990s. Economic policy has significantly improved, with key macroeconomic indicators such as inflation, real GDP growth, fiscal balance and current account balance strengthening substantially since Zambia has large metal reserves and strong potential for growth in the mining industry. While copper dominates the resources landscape, the country boasts deposits of iron ore, coal, uranium and manganese. The prevalence of copper has fuelled foreign investment and strengthened the current account in recent years. The Chinese and Zambian governments are investing heavily in physical infrastructure which, over the course of the next few years, is likely to significantly ease business operations in the country. Improving rankings for ease of doing business. Source: International Monetary Fund, World Economic Outlook Database, April Absa Africa Frontier Portfolio

7 Africa as an investment destination As an investment destination, Africa exhibits the typical characteristics associated with frontier markets geopolitical risks, high volatility, limited trading information and illiquidity due to thinly traded markets. Investing in frontier markets takes patience as investors are often required to leave the comfort of the institutional crowd, make decisions based on asymmetric information and have the courage to pay little attention to negative media hysteria, which often plagues African news. Furthermore, the continent has only 23 listed equity markets, dominated by the Johannesburg Stock Exchange, which accounts for 57% of the entire market, followed by Egypt, Casablanca and Nigeria. As a result, investing on individual stock exchanges remains a challenge. Absa Africa Frontier Portfolio The Absa Africa Frontier Portfolio provides investors with diversified equity exposure across Africa and seeks to capitalise on investment opportunities that are set to be unlocked by the projected growth on the continent. The portfolio comprises best-of-breed investment managers who have displayed consistent performance and superior risk management in frontier markets. Investment features Asset class Equities Risk profile Aggressive Nature of investment Underlying sectors Diversified portfolio of shares of companies domiciled in Africa or have the majority of their assets and operations in Africa. Including but not limited to: Financials, Consumer Discretionary and Staples, Industrial, Telecommunications, Energy and Materials. Investment term A minimum of five (5) years Liquidity Quarterly Minimum investment $ Fees and charges Annual platform fees apply as well as underlying asset manager fees, where possible charging of performance fees may apply. An annual charge is levied for portfolio management and ongoing advice. A comprehensive breakdown of fees and charges is available upon request and will be confirmed prior to or at the time of investment. Absa Africa Frontier Portfolio 7

8 Indicative geographical and sector diversification Geographical exposure of the Absa Africa Frontier Portfolio Source: Old Mutual Investment Group, June Absa Africa Frontier Portfolio

9 Fund manager selection process Our manager selection process combines a qualitative approach with a rigorous underlying quantitative screening process. Quantitative screening Using unit trust and institutional databases, peer groups are created per asset class. These peer groups are ranked according to a range of quantitative factors. Key performance factors include skill, consistency and downside risk. Qualitative assessment It is important to understand the investment manager s philosophy. An in-depth analysis consists of discussions with key decision makers, together with an analysis of the company structure, investment team, investment process as well as understanding the manager s competitive advantage and examining their risk management and control procedures. Manager selection Due diligence materials are presented to the Investment Committee, where consideration is given to both the ability of the manager, as determined by the quantitative and qualitative assessments, as well as the overall blend of managers within the portfolio. Voting is then undertaken by a quorum of members. Ongoing monitoring Ongoing monitoring consists of analysis against specific performance objectives and investment guidelines. The quantitative aspect involves ratio analysis, performance attribution, peer group analysis and assessment of style bias. This is complemented by the qualitative aspect, which involves regular manager contact and a formal manager meeting in person, at least annually. Fund selection criteria Our fund managers were selected on the basis of: Investment team with proven experience and track record in Africa Deep sector and country expertise Investment research with on-the-ground research and extensive links to research houses and brokers across Africa Strong fundamental research capability Physical presence in investment destinations Efficient entry into African markets at lowest cost possible Portfolio liquidity Established deal-sourcing networks Absa Africa Frontier Portfolio 9

10 Sources and references i International Monetary Fund, 2011 ii African Development Bank, May 2013 iii Africa at work: Job creation and inclusive growth, McKinsey & Company, October 2012 iv Programme for Infrastructure and Development in Africa, African Union & NEPAD, January 2012 v What s driving Africa s growth, McKinsey & Company, June 2010 vi Towards African Renaissance: Investment opportunities, Frontline Capital Advisors Ltd, February Absa Africa Frontier Portfolio

11 Contact details For more information, contact: Wealth and Investment Management, Absa Tel: +27 (0) FAIS Act Notice and Disclaimer This brochure/document/material/report/communication/commentary ( this commentary ) has been prepared by Absa Wealth, a division of Absa Bank Limited (Registration No: 1986/004794/06) ( Absa Wealth ). Any reference to Absa Wealth includes its affiliates. Absa Wealth has issued this commentary for information purposes only and you must not regard this as a prospectus for any security or financial product or transaction. Absa Wealth does not expressly, tacitly or by implication represent, recommend or propose that the securities and/or financial or investment products or services (the Products ) referred to in this commentary are appropriate and/or suitable for your particular investment objectives or financial situation or needs. This commentary is not, nor is it intended to be, advice as defined and/or contemplated in Financial Advisory and Intermediary Services Act, 37 of 2002 ( FAIS ), or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever ( advice ). All the risks and significant issues related to or associated with the Products are not disclosed and therefore, prior to investing or transacting, you should fully understand the Products and any risks and significant issues related to or associated with them. This commentary is neither an offer to sell nor a solicitation of an offer to buy any of the Products, which shall always be subject to Absa Wealth s internal approvals and the execution of all requisite documentation between you and Absa Wealth. You have to obtain your own advice prior to making any decision or taking any action based hereon and neither Absa Wealth, nor any affiliate, nor any of their respective officers, directors, partners, or employees (in whose favour this constitutes a stipulation on behalf of another) accepts any liability whatsoever for any direct, indirect or consequential damages or loss arising from any use of or reliance on this publication or its contents, and irrespective of whether or not you have obtained independent advice. Should you be a consumer in terms of the Consumer Protection Act No 68 of 2008, as amended, (i.e. a natural person or an entity with an asset value and annual turnover below R2m) then, the above provisions limit and exclude the liabilities which Absa Wealth will have towards you and also place obligations on you. Any South African person or entity wishing to effect a transaction in any information discussed herein should do so only by contacting a representative of Absa Wealth in South Africa, 187 Rivonia Road, east Block, 1st Floor, Morningside, Sandton, Johannesburg, Absa Wealth A division of Absa Bank Limited Reg No 1986/004794/06 Authorised Financial Services Provider Reg No 523 Registered Credit Provider Reg No NCRCP7 Absa Africa Frontier Portfolio 11

12 East Block, 1st Floor, 187 Rivonia Road Tel: +27 (0)