2. The portfolio view: Were is the world investing?
The case to invest in Africa may be increasingly compelling - but how do investments look through the portfolio lens? Which securities and which channels are global investors turning to as they grow their Africa story?
Investing in Africa: offshore vs onshore? listed vs private?
In volume terms, the typical African investment portfolio is heavily oriented towards fixed income - given the large role that pension funds and institutional investors play in the continent's inflows. Yet there are as many firms investing today into African equities as there are bonds - especially amongst the fund management sector.
Importantly, these African exposures are being taken through a range of channels - driven by home regulation as much as by risk profiles.
Limited as they are by regulatory requirements at home and by limited appetites for FX risk, North American institutional investors are twice as likely to be managing African exposures through offshore securities (such as Eurobonds and ADR/GDRs) as they are via onshore assets. Of this group, 8% are happy to bear the additional cost of ADRs / GDRs specifically to take exposures to South African and Nigerian markets.
By contrast, mutual fund and ETF managers (who face no such requirements) are almost entirely taking exposures via onshore debt securities and domestically listed equities.
The direct investment portfolio is similarly varied. Surprisingly, 11% of strategic investors are using the listed equities markets (rather than private equity) for their investments. As Tanya van Lill (CEO, SAVCA) explained, these investors are mainly larger funds who prefer the operational benefits of listed securities (such as daily pricing, market transparency and deeper liquidity) to the generally shallow private markets in many African economies.
On one hand, this is a good sign of the efficacy of the capital formation process (particularly in South Africa, Nigeria and Kenya) but this does raise concerns around the future outlook - in that this tendency risks driving FDI liquidity towards larger capitalized stocks and hence increasing the divide between large cap and unlisted stocks, with the latter struggling to compete for funding.
Unfortunately though, listed securities aren't always the best long-term choice - as the number of listed companies has shrunk by 10% in South Africa, and 45% in Nigeria over the 15 years to 2021. With increasing numbers of firms delisting (companies going private or folding) in African markets, the “menu of options” is getting smaller.
"Existing definitions of listed- versus private-capital investors don't apply in Africa"
The emergence of the pan-African story
10 years ago, foreign investment flows were heavily concentrated on South Africa, which dwarfed less well known African markets. Today much has changed - whilst South Africa retains its importance, the (one) big market has been replaced by a 'big four' as global investors have taken new exposures to Nigeria, Kenya and Ghana in large numbers. Viewed solely on the basis of the number of investors, it appears that the Africa story is diversifying quickly.
(It should be noted that other, high growth markets in North Africa such as Egypt, Rwanda, etc. are not included in the scope of this research)
This growth is evidence of the shift in investor preferences that we identified above (i.e. from natural resources towards digital infrastructure investments) - a trend that has only accelerated during the pandemic.
According to Standard Bank research, smaller, non-resource economies have demonstrated more resilience and vibrancy in the last few years than their oil-rich peers - with such markets as Botswana, Mauritius, Namibia, Cote d’Ivoire, Zimbabwe and Tanzania seeing a disproportionate increase in investment flows (versus regional averages). Without a single, steady income stream (such as oil) to rely on, these markets have been compelled to focus on education and market diversity as priorities - with the benefits of these investments now starting to materialise.
Unfortunately however, one risk is common to many African markets - and that is the growing volume of government debt. Driven to increase spending in order to maintain stability during the pandemic, many African governments have increased expenditure without a corresponding increase in taxation - triggering a substantial increase in debt levels across the region. Given the high foreign holdings of government debt across Africa, the growing credit risk of these securities is a cause for concern.
The Search for Sexy and the Needy
In their future planning, strategic investors are more adventurous in their choice of African investment markets - targeting significant growth in 13 markets (versus only 9 major markets amongst portfolio investors). But what is driving investors to prioritise these markets over others?
According to Tanya van Lill (CEO of SAVCA), those economies most likely to benefit from global investment flows tend to need one of two key attributes.
First they have to be 'sexy' - with the right sector appeal (e.g. fintechs, ESG, etc.) that goes beyond a single natural resource and that occupies a legitimate, unique space in the foreign investor's portfolio.
But for those not lucky enough to be sexy, being 'needy' can be equally compelling. Those markets that face slow GDP growth or increasing costs of debt can be driven towards significant market liberalisation (such as in currency controls or liquidity) or economic development, with the benefit of triggering an increase in foreign investor flows over time.
Examples from the survey highlight Botswana as a key future destination for both portfolio (with an 8% increase in foreign investors in 2022) and strategic investors (6% of planned investments), driven by its advanced and transparent banking / financial sector (relative to other African markets). Similarly Namibia stands out for strategic investors (9% of planned investments), where there is both an indefinable investment need and no focus on single commodity to support the economy.
"A large number of American investors have a strongly emotional drive to investing in Africa"
2022: the year of the North America to Africa corridor?
In the face of these changing market dynamics, there is no doubt that global investors see a strongly positive outlook for African markets.
With many having withdrawn or put investments on hold during the pandemic, it appears that 2022 will be the year that around a third of investors 'get back in' to African markets - by (re)assuming investments across key markets.
Of these investors, North America's plans for Africa are significant - with 31% of respondents either maintaining allocations or planning to invest in Africa this year. This significant uptick is led largely by fund managers (who plan to increase their Africa flows by 24% this year), with institutional investors also projecting a 18% in flows this year - predominantly into Botswana, Nigeria, Zimbabwe and Mauritius
That all investors maintain such a positive outlook on Africa is striking. But North America's lead, in comparison with an aggregate 15% increase amongst European investors, highlights a potential shift in the structure of foreign inflows into Africa.
Investor education: targeting North American and mid-sized funds
Not only do North American investors have the strongest plans to invest into Africa in 2022, they also have the largest volume of potential, future investors overall.
With almost 50% of those surveyed learning up on Africa pre-investment and a further 36% at the investment stage, the potential returns of greater outreach and education amongst North American investors is striking. Europeans, by contrast, who have three times as many investors running at full capacity in their Africa portfolios (and a significantly higher number of people with no plans to invest into Africa at all) seem less suited to more education.
There’s also a clear difference between larger funds (either pension funds, tier 1 asset managers or direct foreign investment) and the rest of the industry in terms of growth prospects.
A quarter of those surveyed with larger AUMs (>$20bn AUM) are at maximum exposure already – which reflects their long term investment mandates and outlooks which they are likely beholden to.
Growth opportunities, and spare AUM capacity is clearly coming from the sub-$20bn range, where a third to half of firms, while already invested, have spare AUM capacity to deploy.
In terms of new entrants, the least opportunity is amongst small firms. From those surveyed at this level, either they have already invested, or they have no plans to. However, above $500m AUM, consistently a third of all investors are studying /reviewing the market, pre-investment - and its here were future investments into Africa will likely be drawn.