Invest in African businesses; risks are everywhere and so are rewards 

Invest in African businesses; huge opportunities

African economies have been and are expected to continue to be some of the fastest growing economies in the world. A number of reasons have been given to this fast economic growth, including the best demographics in the world, low base in terms of living standards and rising foreign direct investment.

  • Africa has a large population of over 1 billion. This population is the fastest growing as well as the youngest in the world. The African population is growing at a rate of over 2% p.a. and the average age of an African is about 20. This compares to about 0% growth rate and average age of about 40 for Europe at the other extreme. Other regions like Asia, North America and Latin America are somewhere in between. This relatively strong population growth in Africa is a major contributor to fast economic growth, as more people need to be fed, clothed and provided other needed and wanted goods and services. African businesses are best-placed to provide these goods and services.
  • Africa as a region is also well-known to have one of the lowest standards of living in the world, with access to basic goods and services taken for granted in the developed world, still eluding a vast portion of the African population. But as the African economies grow, so do average incomes of Africans and their ability to afford goods and services previously inaccessible. This is especially because the young African (age 20 on average) still has to make purchases of goods and services like refrigerators, microwaves, television sets, computers, cars, insurance, mobile phones, houses – goods and services long acquired by their old European counterparts. Again it is the African businesses that are best-placed to meet this additional demand.
  • As we have seen recently, a lot of multi-national companies have been entering African markets and/or increasing their existing investments in African economies. These include Western companies like Nestle, Microsoft and Vodafone, and African companies like MTN, Shoprite and Dangote Cement, among others. Asian companies like those from China and India have also been aggressively increasing their investments in our continent. This is in recognition of the growth opportunities for businesses operating on the African continent. These growing investments by all these companies are creating a virtuous cycle through their impact on improved labour productivity and thus economic growth.

At LEGACY AFRICA we have been urging investors for a while to invest a portion of their funds in African businesses. We believe that African businesses are well-placed to benefit from fast growing African economies and will deliver strong returns for their investors in the medium to long-term. But some people say investing in Africa is too risky and therefore one should not invest in Africa at all.

Risks are everywhere; everyone knows it

At LEGACY AFRICA we say risks are everywhere, and so are the rewards for those who do their homework and take pro-active steps to manage these inherent risks.

  • One cannot assume that investing in developed economies like USA and Western Europe (relatively stable democracies in countries or regions without any present territorial disputes such as civil wars), it is without risk. Ask those who had their fortunes tied to Lehman Brothers, Parmalat, Nortel Networks and WorldCom, among other Western companies that lost their investors fortunes. Risks are everywhere and must be pro-actively managed even in developed economies. 
  • One can also not assume that investing in so-called volatile regions like the Middle East and Africa is too risky and therefore one should not invest in these regions. With that attitude one will miss out on opportunities provided by companies like Middle East-based Nasdaq listed Check Point Software Technologies Ltd in the technology sector, companies like South Africa-based MTN in the fast growing telecommunications sector and companies like West Africa-based Nestle Nigeria in the food sector, to name just a few. All these companies have delivered strong returns for their investors by providing their goods and services demanded by their clients in these regions and beyond. This is despite the volatile nature of their operating environments. MTN is now the largest telecommunications company on the continent, thanks to its Nigerian business which now makes about half of MTN profits.

Everyone knows risk is everywhere. Professions like law, auditing, risk management, among others, exist because of the awareness of inherent risks. Industries like insurance, banking and security exist for the same reason. Strategies and tools have been developed to help manage risks. So don’t be afraid of taking investment opportunities provided by African businesses. Manage risks pro-actively.

Invest in a diversified portfolio of African businesses; actively manage risk

One of the well-known and relatively easy to understand strategy of risk management is diversification. Everyone knows that you “Don’t put all your eggs is one basket.” This applies to most of our daily pursuits including investing. A recent example of the power of diversification was seen in 2014 when one of the oldest lenders in South Africa African Bank collapsed, losing shareholders billions of Rands. A number of South African equity funds owned shares in African Bank and therefore all suffered large losses.

However, because these funds had invested in 20 or more other companies over and above African Bank, their losses from African Bank were significantly mitigated. To give a simple example, a fund that had 5% of its money invested in African Bank, with the rest invested in 20 other companies (e.g. Mr Price, FirstRand, and Anglogold, among others) that returned on average 10% in 2014 still gave a positive return of 4.5% for its investors despite a major loss in African Bank. This is good news for investors anywhere in the world as this shows good investment opportunities can be pursued despite the inherent risks as tools such as diversification can help reduce risks.

LEGACY AFRICA builds diversified portfolios of African businesses

At LEGACY AFRICA we use our comprehensive investment process to look for African businesses that are well-positioned to benefit from fast growing African economies. We then put these businesses together into diversified portfolios of 20 or more businesses for our clients. We further diversify our portfolio by investing in different countries (e.g. South Africa, Nigeria, Kenya, Egypt) and different industries (e.g. banking, telecommunications, food production, cement). This further reduces the risk without missing out on opportunities presented by our continent. Companies such as MTN, Standard Bank, Shoprite in South Africa are some of the businesses we like. We also like businesses from Nigeria in West Africa (e.g. GT Bank, Nestle Nigeria, Dangote Cement), from Kenya in East Africa (e.g. Kenya Commercial Bank, Safaricom and Athi River Mining) and from Egypt in North Africa (e.g. Commercial International Bank, Mobinil and Talaat Moustafa Group) among others. A lot of these companies have already delivered strong returns for their investors and at a signicantly reduced risk within a well-diversified portfolio and some will continue to do so. Invest in African businesses; there are huge opportunities on the continent.

Written by Senzo Hlangu