African investment isn’t about the macro: du Toit

Investec’s founder Hendrik du Toit says investments in Africa require strong due diligence and a long-term outlook if they are to capture the continent’s growth.
African investment isn’t about the macro: du Toit

The top-down view of Africa is increasingly positive, but Hendrik du Toit, founder and CEO of Investec Asset Management, says investors should not rely on headlines when putting money to work there.

Opening AsianInvestor and FinanceAsia’s groundbreaking Africa Investment Summit in Hong Kong, du Toit says the region requires both careful due diligence and a long-term appetite.

Such investors should benefit from the continent’s growth story, the potential of its young demographics, and the gains as it is increasingly integrated into global trading networks.

That said, du Toit cannot resist a bit of macro razzamatazz. “I missed Brazil,” he says, noting that government bond yields there have been halved over the past two decades. “I won’t miss Africa.”

He is careful to say that most African investments are not going to provide get-rich-quick results to portfolio investors. The only country with a deep capital market, South Africa, is also the least compelling growth story.

But Investec’s pan-African equities portfolio generates a consistent 5% equity dividend, with earnings multiples in the range of 9-13x, depending on the individual market. On the debt side, he says investors can enjoy a 10%-plus yield in US dollar terms without leverage. Real estate is probably the most mature asset class in Africa and direct or third-party exposures can return 12-17% on an annualised basis.

“That is compelling in a world of zero interest rates,” says du Toit, adding that growth rates in other emerging markets such as Asia are tailing off.

Chinese investment is playing a catalytic role in Africa’s growth story. Most Chinese money focuses on extracting resources, and du Toit argues that Africa offers far more to investors than just that – but acknowledges that resources are what have jump-started the Africa story, particularly around Chinese infrastructure projects, as well as similar investments or engagement by Russia and Brazil.

“Bric countries have done things, have built things, have built the African growth motor,” du Toit says, noting that now South Africa and other southern African governments and businesses are also investing and making a positive contribution. It is such connections that ultimately underpin the expansion of the continent’s real estate and corporate bond sectors.

Although the motor has been started, it is increasingly up to local actors to get the car on the road, and that requires major improvements to Africa’s financial infrastructure. Du Toit notes that local capital markets fall well short, particularly now that beleaguered European banks, the primary source of lending, are beating a retreat.

Although there is investment capital from places such as Russia and China, it is too focused on either short-term deals, or on building stock markets – the hardware. The biggest shortfall is African long-term investors.

Although Nigeria and South Africa are developing pension schemes, there is no way the 54 countries of the region can build deep or liquid markets without more local anchor institutions. It is such buy-side entities that are necessary to price transparency and good governance; foreigners cannot substitute.

Another area where the continent needs to do better is training and educating its young population. On paper, Africa has the best demographics in the world. Its people have little debt and many countries are on the cusp of a huge boost to their working-age populations.

To ensure this is a ‘demographic dividend’ and not a ‘population timebomb’ means ensuring they are adequately trained and educated – and so far, as a whole, Africa is not succeeding. Secondly, even if these people do receive a basic education, and even if the roads and such are in place to get them into the cities, they will need decent jobs.

That means manufacturing, and here, again, most of Africa is lagging. There is a risk that some countries rely too much on their natural resources, that their elites focus their time on divvying up nature’s spoils instead of working to diversify their economies.

Du Toit suggests investors review the region by city, not by country. Federal or national governments don’t always work well – a legacy of colonial-era boundary lines – and the real dynamism is in places such as Lagos, Accra, Cairo, Nairobi and Kinshasa. However some of these places are better managed than others.

“Urbanisation facilitates economic growth but it also poses risks to social stability,” du Toit says. “Africa has all the ingredients to make it, if the leadership and the planning are executed well.”

Investors should be on the lookout for opportunities in Africa’s emerging consumer class, but allocations should be scaled. Today only 13 million Africans have discretionary spending of $500 or more per month, so it’s a slow build. Mobile telephony makes things like financial services increasing accessible. The biggest gap is manufacturing.

If the city is one level of activity, the other is the regional trade groups that bring together southern, eastern and western African nations. These have the potential to unlock value and free entrepreneurs to operate at a sub-regional level, creating scale. But this requires leadership at the national level, which appears to be a weak point for many governments.

“If we get capital and inspire the leadership to look after our long-term success, then we can participate in the last great story of human development,” du Toit says.

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