Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Oliver Bell, manager of the T. Rowe Price Frontier Markets Equity Fund, discusses the longer term drivers for Africa’s fledgling economies as part of Morningstar's Guide to Emerging Market Investing.
Africa has made huge economic strides in recent years as economies and capital markets have liberalised. The impressive reforms many countries have undertaken over the last two decades have resulted in smaller public and private deficits, more prudent use of commodity windfalls, lower inflation, lower levels of debt and higher international reserves. The region now offers access to one of fastest-growing areas of the global economy. Most tellingly, foreign investment is pouring into the region, with China contributing $100 billion from 2005 to 2010, one-third of its entire foreign direct investment during that period.
The uncertain political environment within the region has long been used as a reason to limit investment. However, we have seen greater political stability in recent years from a number of countries. Between 2011 and the end of 2013, 50 of the 54 countries in Africa conducted a democratic election. Within the region, we are also increasingly seeing a new generation of political and business leaders focused on growth and creating environments where business and economies can flourish. Policies are now being increasingly targeted to encourage growth, while foreign investment is being harnessed to help build sustainable conditions for this growth.
Of course, there will remain troubled countries such as Libya, but these have little impact on the growth prospects of the region overall. Additionally, with 54 countries within the investable universe, there are many other opportunities. Still, news of unrest anywhere can be hard to shake. Therefore, the greatest challenge is to work out how much of the noise we see and hear in the media is relevant. Even more of a challenge is bridging the gap between the trouble spots and the opportunities.
Superior Company Earnings Growth
The robust top-down credentials and the broad structural changes across the region have created enormous opportunities for investors. Currently, there are many companies with the ability to grow compounded earnings 100% over the next three years. These stocks are not valued correctly, given the structural changes and tailwinds expected in the coming years as countries continue to reform.
Financials Levered to the Growth
Financials can, in some respects, be considered as a levered investment linked to an underlying economy. A banking system operating within a growing economy, with controlled nonperforming loans, is a good starting point to identify growing and profitable banks. We see many such examples in the frontier world today. The return on equity for many financial stocks in Africa is very large, while tier 1 capital ratios are also high. Africa also has one of the lowest banking penetration levels globally. Currently, only 24% of adults in sub-Saharan Africa have bank accounts. African financials are also a great example of restructuring and innovation and, in many ways, are leading the world in terms of how money can be moved by consumers.
World Leaders in Mobile Banking
The growth in mobile cellular subscriptions is well known in Africa, but perhaps not as well-known is the fact Africans have been at the vanguard of financial transactions – via mobile technology. Much of this has come about through the lack of proper infrastructure and poor traditional banking systems, but this is a great example of how companies and consumers have adapted to structural problems. Safaricom, the leading mobile network operator in Kenya, is one such example. It currently conducts monthly financial transactions equating to 27% of the country’s GDP.
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