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Emerging Markets Help Pull Africa Up

Friday, 21 Aug 2009 | 12:06 PM ET

Africa's investment fortunes are shifting, as the 'Dark Continent' becomes gradually less dependant of its main trading partner, Europe, and attracts investor from fast-growing emerging countries.

The key to Africa's survival in weathering the financial storm is a revival in interest in the region's commodities, with investors from the BRIC countries searching for good opportunities.

"Africa is kind of a backyard of resources in terms of a lot of the world are looking further a field to get their resource supply and a lot of BRIC economies have actually done foreign direct investment into Africa," John Cleary, CIO and managing director at Focus Capital, told CNBC.

"We think foreign direct investment for the next 5-10 years will dwarf portfolio investment into Africa. So we think the potential is really high and only improving, and that's all positive for Africa in the long term," Cleary added.

Africa has benefited from a surge in Chinese investment in recent years. The country's trade patterns have changed, even though Europe is still the most important trading partner, Marion Muhlberger, emerging market analyst at Deutsche Bank told CNBC.

"The Chinese share in total trade with Africa has doubled within the last 13 years and this trend is going to continue as this makes Africa less dependent on business cycles within Europe and gives them the possibility not only to sell commodities but maybe also other products like manufactured goods to China," Muhlberger added.

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Vast amounts of arable land which are underused, huge young population, which may not be educated enough but have potential, many under-serviced markets with growth potential are among the domestic competitive advantages of Africa, analysts say.

The continent holds "fascinating market opportunities" as the region is "very variable," James Bevan, CIO of CCLA Asset Management, said.

Egypt has "fantastic global-class cellular communications companies," South Africa has "very advanced financial services and mining."

Bevan suggested a traditional investment strategy of looking at global companies that operate in African markets that are fast-growing, while Ayo Salami, CIO of Duet Victoire Africa Index Fund, told CNBC he favors African telecoms companies, brewers and cement companies.

Africa's banks, which U.S. Secretary of State Hillary Clinton said "are solvent and well regulated and largely free of the type of bad loans that led to the bank's failures in my country and others," have been mostly unfazed by the global financial crisis.

Not for the Short Term

There are great long-term opportunities in Africa's frontier markets such as Nigeria, Ghana and Kenya, but short-term, Africa's markets "are very difficult to access in terms of liquidity and trading volumes" Cleary warned.

African countries are amongst the worst performers year-to-date, with many still in negative territory, so you're not going to make "your bank for your buck," Cleary said.

"They are difficult to get into and more difficult to get out of," he said of the markets.

Muhlberger agreed, saying that the main challenges facing the region are the illiquidity of the markets and their small size. She added that no other African market can match South Africa in terms of liquidity and accessibility.

Cleary is bearish on African equity markets in the short term and doesn't recommend individual funds or sectors or stocks, but sees potential in Nigeria, Ghana, Kenya, Tanzania, Uganda and Zambia.

African Miners
AP
African Miners

"Ghana has some fantastic equity market returns. But it's only a $1 billion market ... which gives you some reference to how small these markets are at the moment," he said.

Muhlberger added to Cleary's sentiment, saying that the "new frontiers" such as Nigeria and Ghana were promising as they are trying to tackle the challenges mentioned by attempting regional integration of their stocks markets, like Kenya, to make them bigger.

Their governments are also trying to issue debt externally in order to create a benchmark for domestic companies so that the corporate bond market can take off. Domestic and international bond markets are growing from a low base, she pointed out.

Economy is Down but Not Out

In the world's second biggest continent it is usually South Africa that investors look to first. But South Africa's high unemployment level of 23.6 percent and the three consecutive quarters of economic contraction made investors nervous about the country.

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The economic slowdown has "interrupted the African renaissance" but it has not reversed it, Muhlberger said.

Cleary is also bullish on African economies — "You've got to take a longer-term view on Africa. The economic situation is much improved."

Another factor making African countries attractive is their lower level of debt, Muhlberger added.

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