Real GDP increased by 6.5% in 2007 throughout the region as a whole. This was predominantly due to growing industrial production, increased output of oil exports, and rising domestic investment. These favourable conditions have resulted in a flurry of Foreign Direct Investment (FDI) led by China. FDI has been stable at about US$15–21 billion over 2007, with private equity and debt flows to Sub-Saharan African countries estimated at about US$53 billion in 2007 according to International Monetary Fund (IMF).
Financial Express Analytics shows that 681 funds, across the entire investment universe, have some exposure to Africa as a whole, with 25 funds possessing over 20% exposure to the region. As these funds are relatively young, with an average age of less than 3 years, the performance cannot be scrutinised in great depth. Nevertheless the 13 funds displaying a history of at least a year have produced an average return of 5% over the year to August 2008, outperforming the S&P 500’s loss of 11% over the same period – this has also been supported by maintaining low R-squared figures coupled with a negative correlation to the S&P 500.
Its expected to see these figures increase as this region develops, with a number of investment managers to launch funds that tap into a broader range of these emerging economies, when not long ago funds with a core focus to derive returns from this region as a whole were few and far between, with most exposure offered to the more developed South Africa. South Africa is therefore our specific country focus, and is highlighted in the map above, due to its more established position.
If we focus on the elder South African Mutual fund sectors, we see that South Africa as a whole has been prosperous over the 3 year period to August 2008, with even the lowest performing sector, Domestic Fixed Interest Bonds, returning 16%. The table below highlights the top 3 sectors and the bottom 3 sectors in relation to the MSCI South Africa Index.
The top performing sector has been the Domestic Equity Resources & Basic Industries sector, displaying a return of 131% over the period. This is highly reflective of the global resources and commodities story, with these sectors having performed well across the globe. This has been due to mass increases in demand over recent periods for these raw materials, resulting in great spikes in commodity prices.
By cutting into specific funds, Analytics show that 690 exist, with 454 displaying 3 year histories, with the average fund returning 43%. Nevertheless it is worth noting that despite the top performer, Investec Commodities fund, returning an impressive 172% over the last 3 years, only 36 funds managed to outperform the MSCI South African Index’s 72% return over the period.
When taking risk into consideration we see that 28 funds exhibit a better risk return profile than the MSCI South African Index’s 72% return given a 17.4% risk (to last month end, July 2008). A fund that stands out is Coronation’s Resources fund, which has produced a 142% return with a standard deviation of 19.7% over the last 3 years. Once again this result strengthens the resources story throughout this region as a whole, as the commodities and resources sectors continue to drive the growth within all Sub-Saharan constituencies.
Another notable sighting has been that the majority of funds have displayed positive returns over the course of the year whilst global economies have slowed, as when addressing the MSCI Index’s 1 year performance it is evident that investors who had exposure to this region would have preserved capital well with an Index return of 0.2%, whilst the credit crunch hit the western world. This supports the view that African markets have so far shown limited reaction to continuing turbulence in global financial markets, which ultimately consolidates the regions negative correlations to differing worldwide markets.
Nevertheless many risks exist as the external environment becomes less favourable. Exports from Sub-Saharan Africa may reduce, alongside FDI into the region. In addition rising oil and food prices pose increasing inflationary pressures to many countries within the region.
Valuation is also hard to gauge across the board, leading the decision to invest within the 44 Sub-Saharan African constituent countries to be done on a bottom up case by case base, as each country possesses its own diverse specific risks. Only Exotix, an African Brokerage firm, provide a top down valuation approach to the Sub-Saharan African region as a whole.
The overall outlook for the region looks relatively attractive with the key long-term goals for the region to increase its oil reserves, exports, infrastructure and continue to accelerate growth. This should help the region reach its Millennium Development targets, set by the United Nations, with an aim to improve the lives of at least 100 million slum dwellers by the year 2020. The ever improving financial conditions across the region as a whole have made Sub-Saharan Africa a cesspool for FDI in recent periods, with a variety of investment vehicles availing themselves. This should continue to lure investors into this promising marketplace.
|
Name |
3 Mnth |
6 Mnth |
1 Yr |
3 Yr |
5 Yr |
3 Yr |
3 Yr |
|
Domestic Equity Resources & Basic Indutries |
-20.7 |
-7.4 |
8.0 |
130.9 |
250.5 |
16.4 |
20.2 |
|
Worlwide Equity Varied Specialist |
-19.2 |
-10.9 |
2.2 |
78.7 |
|
15.7 |
15.1 |
|
Domestic Equity Large Cap |
-16.1 |
-4.9 |
-2.6 |
76.9 |
224.9 |
5.1 |
15.2 |
|
MSCI South African Index |
-13.3 |
-0.9 |
0.2 |
72.4 |
194.7 |
0.0 |
17.4 |
|
Domestic Fixed Interest Income |
3.1 |
4.6 |
9.8 |
24.3 |
48.5 |
7.6 |
1.3 |
|
Foreign Equity Varied Specialist |
-16.7 |
-11.9 |
-13.8 |
24.2 |
79.1 |
5.5 |
15.0 |
|
Domestic Fixed Interest Bond |
3.3 |
1.6 |
5.4 |
15.9 |
48.3 |
5.2 |
6.1 |
For more on Sub-Saharan Africa click here
*Source of data: Financial Express Analytics