Financial ExpertSpeak: African investment landscape promising for institutional investors
The head of integrated financial services group IPRO, Stephane Henry, spoke to AfricaMoney about the challenges facing three key sectors of the economy – sugar, tourism and financial services.
Stephane Henry, CEO of Investment Professionals Ltd (IPRO), spoke to AfricaMoney about the challenges facing three key sectors of the economy – sugar, tourism and financial services. As the head of an integrated financial services group which specialises in Africa and India and has been present in Mauritius since 1992, our financial expert gave valuable insights into the African and Indian investment landscape.
Edited excerpts from an interview:
Can you comment on the demand for Africa-focused funds?
There have been some very interesting developments in Africa during the last ten years, both economically and politically. Africa is ready to be an investment avenue for investment funds. The continent remains an investment which can fit into institutional portfolios, for instance pension funds or insurance companies. Africa has been offering high returns over the last five years and is potentially capable of offering good returns over the next five to fifteen years, but remains quite small in terms of market capitalisation and challenging in terms of liquidity of stock exchanges. And, the continent is highly fragmented with many countries across Africa at various stages of development, making it very difficult and very costly to invest into.
So, Africa can only be seen as a diversification of the portfolio and cannot be a substantial chunk of any investment portfolio. Investors from the US, from Europe and even from Africa are interested in investing more into this emerging continent but must be aware that there are two forms of investments available to them. First, investments into companies which are not listed on the stock exchanges, and secondly, into listed equities. For instance, IPRO’s African Leaders Fund invests into the main stock exchanges present in Africa such as the stock exchange of Nigeria, Kenya, Botswana, Zambia, Ghana, Ivory coast or South Africa.
Which countries in Sub-Saharan Africa are seeing the most interest from investors?
In fact, today, the region within Africa which attracts the most attention from institutional investors is the East African corridor – Kenya, Uganda and Tanzania primarily. South Africa is in a very difficult economic situation right now and is not attracting a lot of investors at this point in time. Central Africa is a difficult zone which includes strife-torn Congo and I think very few people will dare to invest into these places right now. The Anglophone West Africa, which includes Ghana and Nigeria, have faced a number of economic challenges, current account deficits and weak currencies which frighten the investors a bit. The two zones which seems to emerge right now from very low levels are the Francophone West Africa, with emphasis on Ivory Coast and Senegal. Then again, North Africa is showing signs of rebound, principally countries like Morocco or Egypt. Egypt, which was the leading investment hub in MENA has been very volatile since the revolution which took place a few years ago but now seems to be on the right path to overcome these challenges and seems to attract investors again. There are still a number of problems with Tunisia and Libya but overall North Africa seems to be a better place for investments compared to what it was two years ago.
With Nigeria being crowned the largest economy in Africa after the GDP rebasing exercise, Nigeria’s Finance Minister mentioned that the ‘psychological’ impact would spur greater investment into the West African frontier economy. What are your views?
I think that in terms of investments, the rebasing of the Nigerian GDP will have a limited impact. Few people were really surprised that the GDP has increased by 90% after the rebasing. What matters more for investors is the growth rate. As a matter of fact, Nigeria has been one of the worst markets in terms of performance since the start of the year because of the dispute between the Nigerian President and the ex-head of central bank, Mr Sanusi, who was forced to leave the Central Bank of Nigeria and was replaced by the ex-CEO of Zenith Bank. Then again, Nigeria has been very volatile since the beginning of the year, especially its currency Naira. So, Nigeria is quite a challenging place to invest in and is very difficult to analyse. For instance, we now have proof that almost half of the economy was outside the previous figures published by the Nigerian authorities. But, it nevertheless remains a place with lot of vibrancy and a lot of dynamism which can be seen in terms of being the birthplace of leading African conglomerates like the Dangote Group, owned by Aliko Dangote who is renowned as the wealthiest person in Africa. Overall, I would advise caution to investors eying Nigeria as it forms part of the Anglophone Western African belt, which, together with Ghana, has been facing some economic difficulties.
What about IPRO’s India-focused funds? Has any drop in demand been seen?
Yes definitely, over the last three years at least, India has faced many challenges. The stock exchange has been trending down over the last three years, and last year in particular, the Indian rupee went down significantly against the US dollar. As a result, international investors, primarily institutions, have been on the sidelines as far as India is concerned. Very few investors now want to take risk with investments denominated in Indian currencies and are now waiting for the results of the general elections in the country before coming back to the Indian market, both in terms of currency and equities.
The Annual Report of IPRO Growth Fund for the financial year ended 30June13 mentioned that the local portfolio gained 8.7% during the financial year to 30June2013, slightly underperforming both SEMTRI and SEM -7, which gained 10.7 and 10.2% respectively. How has it performed in the current financial year to date?
The local portfolio for IPRO growth fund has increased by 8% since the first of July as a result of improved market prices overall on the Stock Exchange of Mauritius (SEM). Primarily, the financial services sector and the tourism sector have performed well. But we have seen that, since the first of January, the market has been more or less flat primarily because of the current weak demand from international tourists visiting Mauritius. The figures which have been published for tourism have not been good and particularly the figures for occupancy rates for hotels are disappointing. We should still be very careful in terms of investments into hotel stocks which are listed on the SEM. They still have a lot of debt on their books and this is really affecting their bottom line. Any improvement in the SEMDEX is not expected before the last quarter of the current calendar year.
Also, your international portfolio gained 29.8% over the year, outperforming the MSCI EFM Africa ex SA which gained 27.7% and underperforming the MSCI FM Africa which gained 63.8%. How has it performed in the current financial year to date?
Since the first of July, this portfolio has been more or less flat primarily as a result of the drop of the market in Nigeria which we have previously discussed. And, Nigeria being more volatile, obviously the MSCI EFM Africa index has been flat as well so, we are in line with that index. However, we have under-performed the EFM Africa ex SA index that includes Egypt which is a place that has rebounded quite well. But 2012 and 2013 were extremely good years, where our investments in Africa returned 23% and 20% respectively in USD terms.
What are your expectations for 2014 in regards to African Market Leaders (AML)?
Today the fund is down by 5%, but we expect a rebound in the coming months. After two years of excellent performance, we’ve seen the market being much more volatile in Nigeria, Ghana, Zambia and in Botswana as well. In Zambia, the currency has been affected by weakness of the copper price, which is the main commodity. So, we see increasing challenges in the region but we are currently rebalancing the portfolio and expect improved figures during the coming months, and a moderate positive return for 2014 as a whole.
Could you tell us about the key investment sectors that AML is focusing on? Which are the sectors that are seeing maximum investor interest?
The sectors into which we invest are the ones that hold most promise for international institutional investors. There are four main sectors we focus on. The first one is the banking sector. When a region sees significant growth, as it is the case now in Africa, banks will typically benefit from that growth. They will be in a position to expand their loan books, both for the corporate sector and for the retail sector. Accordingly, will expect profits from banks to improve significantly when there is real economic dynamism happening in a specific region.
The second important sector we are investing into is the telecommunications sector through two main investments: Safaricom in Kenya and Sonatel in Francophone Western Africa. Sonatel is a subsidiary of France Telecom, while Safaricom is 40% owned by Vodafone. We see increasing demand from added value services related to mobile telephones, like for instance, the e-payments services which have been offered by Safaricom in Kenya for almost ten years. Africa is certainly a place where the telecommunication sector has been very dynamic with lots of investments, and companies which have invested into this sector in Africa are now showing the benefits of their investments.
The third interesting sector for investments is the cement industry with lots of new roads and lots of new constructions for both residential and for building industries, etc. We see an increasing demand for cement and a number of groups which have been present in Africa for that industry are investing a lot into that sector to build up their capacities and certainly, this is the sector which will deliver interesting growth in the future.
And the last sector where we invest a lot of our equity fund is the consumption sector, primarily consumer staples and the agricultural business for a number of companies in Zambia, in Kenya, in Nigeria which should benefit from a higher demand from the middle class population which is expanding. The growing middle class is expected to consume more and more during next ten to twenty years. So, all companies which are producing for the growing middle class will definitely benefit from the upsurge in demand.
Finally, please let us know your views on the Mauritian economy regarding opportunities and threats to investing in Mauritius.
The Mauritian economy is certainly at a crossroads now with huge challenges affecting three of the key sectors of the economy.
First of all, the sugar sector has been hit by declining international sugar prices now that Mauritius is not protected by favourable quotas from the European Union. The prices and the volume of sugar being sold by Mauritian producers are both on a downturn. We should be concerned by the over supply that we can see internationally, which results in lower international prices of sugar and in turn eats into the profit of the local sugar groups.
Second is tourism, where we have seen that over the last five years, the number of tourists coming to Mauritius has barely grown. On the other hand, room supply has increased, which means that occupancy rates are logically going down, and if the demand for rooms is going down, prices are going down as well. All the main hotel groups in Mauritius have a lot of debt and interest charges weighing on their books, and we are accordingly quite concerned about the future of this sector.
And lastly, the financial sector, which has gotten off to a good start, but will continue to be affected by uncertainty over the Double Taxation Avoidance Agreement (DTAA) with India. We have seen important investment funds moving from Mauritius to Singapore and, as previously mentioned, the Indian stock market and the Indian rupee have not yielded good returns. So, there is currently a dip in investments routed to India from Mauritius. Overall, all global business companies (GBCs) which have grown over the last twenty years thanks to the DTAA, are now seeing hurdles come in the way of growing their client base and are working more and more with countries in Africa, in relation to investments into Africa. However, the status we had achieved as a preferred route for India investments has suffered and will affect GBCs which have traditionally done a lot of business in relation to India. So, the good news is that the uncertainty over the India tax treaty is forcing GBCs to do more business with Africa. But, it cannot be denied that their main source of income, which has always been India, is struggling and the threat with regards to the India-Mauritius tax treaty is adversely impacting this sector.