Nelson Mandela's impassioned call last September to lift trade and investment sanctions against South Africa has spurred modest interest in investing in Africa.
South Africa's large market remains the premier attraction in the region. But as more foreign investors travel to that distant land, they also have been stopping to visit other regional markets, such as those of Zimbabwe, Botswana and Kenya. While liquidity and limited choice are just some of the problems investors face in these markets, they have found selectively attractive investments, such as Delta Corp. in Zimbabwe and Sechaba Investment Trust in Botswana.
While the early bird investors explore Africa, more investment funds have been springing up. In some cases, managers offering funds are motivated by interest generated in South Africa's demolition of apartheid. In other cases, they see opportunities to pioneer newer markets whose underlying economies are starting to benefit from structural reforms. Whatever the motives, the Micropal Emerging Market Fund Monitor now counts 38 country and regional funds for investing in sub-Saharan Africa, excluding South Africa; as of December, there were 57 South Africa country funds for local investors that are open to foreigners.
Investors see two main attractions to sub-Saharan Africa. Despite poverty, underdevelopment and political turmoil in some regions, the area not only is rich in natural resources but also has governments and leaders turning ever more toward Western-style capitalism in the wake of the Soviet Union's collapse.
More governments are having to accept more stringent economic conditions - trimmer budgets, lower inflation and the like - as prerequisites for aid from such organizations as the International Monetary Fund. As Morgan Stanley & Co. reported in October: "The continent is poised for growth. Of its 50 countries, 28 have economic reform programs in place. Thirteen stock markets are up and running, with four more planned within the next two years."
While most of the regional markets fall into the "pre-emerging" category, South Africa's roughly $185 billion market is a relative giant - one that provides investors with greater choice and better professional trading amenities such as custody and settlement services. On the downside, trading liquidity even in South Africa's market tends to be thin, because local institutions, which had been barred from investing outside the country, have tended to buy and hold South African shares.
Politically and economically, the country paid a price for its long-time adherence to apartheid, since it became the recipient of international trade and investment sanctions. Dismantling apartheid encouraged foreigners to drop their sanctions, but local violence and political infighting have sustained investors' concerns.
After South Africa holds its first multiracial elections April 27, many are at least hoping calmer political times will follow. Economically, the news already is improving. After a prolonged recession, the country, with a 46% unemployment rate last year, apparently is on a growth track: James Capel & Co., London, anticipates about 3% gross domestic product growth this year, up from about 0.8% last year (due to a strong fourth quarter).
More businesses are coming back or setting up shop, which could only enhance economic growth in this nation, which represents the largest industrial base in Africa. As of March, in the United States alone, 150 companies had direct investment in South Africa, up from 119 a year earlier, reports the Investor Responsibility Research Center Inc., Washington. The group said that since September, 121 state and municipal laws imposing sanctions had been lifted, with only 58 remaining.
No wonder some investors are tending to agree with Justin Beckett, president of New Africa Advisers of Durham, N.C. To him, South Africa's market not only will benefit for fundamental economic reasons but also because it has become "politically correct." Indeed, his firm (a unit of the Sloan Financial Group) is adviser to the new Dreyfus New Africa Commingled Trust Fund, which will invest in Africa, starting in South Africa.
Earlier this year, Edinburgh-based Martin Currie Inc. raised its Africa weighting in emerging markets funds to 5% from 1.5% (90% of that is in South Africa) The move was "an optimistic assessment of the outcome of (South Africa's) elections," said James Fairweather, director. Among the stocks he likes in South Africa: Rembrandt Group Ltd., which is heavily in tobacco and spirits; Iscor Ltd., the iron and steel producer; Safren in shipping and Barlow Ltd. in cement and capital equipment.
Outside of South Africa, sub-Saharan countries with markets deemed relatively attractive include Ghana, Zimbabwe and, to a lesser extent, Namibia. "I'd put the spotlight on Ghana at the moment, and (secondarily) I would share the light equally with Zimbabwe, Botswana and Namibia," said Michael Power, an African and Middle East specialist with Baring Asset Management, London. He also recommends "watching Kenya," where the lifting of foreign exchange controls this year should be a key factor encouraging more international investment. Indeed, Nairobi's market has rallied strongly ahead of the expected complete lifting of exchange controls, said Elizabeth Morrissey, managing partner, Kleiman International Consultants Inc., Washington.
Ghana's attractions stem from its economic improvements since restructuring measures were instituted in the early 1980s. According to Morgan Stanley's 1993 data, real GDP of this heavily agricultural land advanced about 5% annually for the last decade. The on-going privatization process this month will feature the government's 25% sale of Ashanti Goldfields, one of the world's largest gold mines (one-fifth of these shares will be sold on Ghana's local stock exchange, while the remainder will be sold in the London market). Seven other recent privatizations also are helping to expand foreign interest.
Zimbabwe's market began surging last year as officials opened the market to foreign institutional investors. This year, the market has continued its breathless accent, posting a 44.3% rise in U.S. dollar terms through March 11, according to the Investible Price Index of the International Finance Corp., Washington. Zimbabwe's left-leaning politics have been changing and it is strong in three of the areas in which sub-Saharan Africa has strengths: agriculture, mining and tourism.
Namibia is known for its mineral richness, including diamond reserves. Botswana, also endowed with minerals, is equally renowned for cattle-raising and tourism.
While a number of the stock markets in these countries have already had rallies, more opportunity should emerge as more companies list their stock publicly. In the popular markets, "existing companies have become properly valued," said Baring's Mr. Powers. In his view, "the real opportunity will be with (other) companies that are encouraged to come to market and list their stock."
