Mark Mobius: Africa – challenges and outlook

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The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

In my previous blog, I touched on some of the opportunities I saw in Africa. In this post, I will discuss what I think are the continent’s key challenges and my outlook for the region.

Corruption is a major problem in Africa. However, it takes two to tango, so accusations of corruption against African governments could also potentially be lodged against entities in the developed world that seek to buy the influence of these governments. One important development has been the Cardin-Lugar amendment to the Dodd-Frank finance reform bill in the U.S., requiring among other things, that oil, natural gas and mining companies registered on the New York Stock Exchange disclose any payment made to a foreign government for the purpose of the commercial development of oil, natural gas or minerals. Some believe that the Cardin-Lugar amendment is more important to Africa than the debt relief of the last decade.

The sentiments that arose in recent tensions in North African countries such as Tunisia, Egypt and Libya have spread not only to other African and Middle Eastern countries but also to Asia and other parts of the world. I believe regimes that do not have the support of the public and have not been elected democratically are likely to come under increased pressure going forward. Such a transition could lead to periods of volatility, as we continue to see in the Middle East and North Africa. While these events can be distressing and sometimes have a very high personal cost, it is important to consider how these developments can act as building blocks for the future, with increasing economic and political freedom being very positive for the welfare of individual countries as well as the overall region in the long term. Wherever we invest, we do consider these risks and factor them into our investment decisions.

Despite Africa’s problems, I believe the long-term outlook for the continent is bright. With its substantial wealth in natural resources such as gold, oil, platinum, iron ore, copper and large areas of arable land, Africa is well-placed to benefit from increased growth and higher demand in emerging markets such as China and India. In 2010, Anand Sharma, India’s Minister of Commerce and Industry, announced that the Indian government planned to invest US$1 trillion in Nigeria and other parts of Africa during the next decade. In countries such as Angola, Nigeria and Ethiopia, rapid economic growth has resulted in better living conditions, lower child mortality, higher primary school enrolment and greater access to clean water. As larger emerging markets increasingly invest in Africa, we are seeing a lot of money funnelled toward infrastructure projects such as roads, bridges, schools and hospitals, all which are likely to benefit African economies over the years to come.

Source: Mark Mobius, Investment Adventures in Emerging Markets, April 26, 2011.

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Africa – opportunities in Nigeria, Ghana and Kenya

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The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

Those who are optimistic about Africa say that after many years of colonialism, it is beginning to demonstrate its potential. The continent does have its detractors, who say that while it may have been free of colonial rule for 60 years, the continent continues to battle poverty, corruption, AIDS and armed conflict. However, while Africa does have challenges, I am encouraged by another side of Africa that is gradually emerging with the development of capital markets, consumerism and technology.

I believe the opportunities for the development of Africa’s markets are appealing primarily because of the strong growth numbers now emerging out of the continent. Africa is expected to grow more than 7% annually in the next 20 years, due to an improving investment environment, better economic management and China’s rising demand for Africa’s resources.[1] More than 100 African companies have revenues in excess of $1 billion.[2] Africa also has impressive stores of resources, not only in minerals but also in food — 60% of the world’s uncultivated arable land is found in Africa.[3] As global demand for hard and soft commodities continues to grow, I believe Africa is in an enviable position with its vast natural resources. The potential for long-term growth in consumer-related areas is also very attractive, with around 1 billion inhabitants on the African continent.[4] These are people, just like many others all over the world, with aspirations to own their own homes and buy possessions such as cars, refrigerators, washing machines and the like.

Within Africa, Nigeria is one of the frontier markets that I like. The country has a population of about 155 million people.[5] It is rich in oil and gas reserves and raw materials such as iron ore, coal and bauxite. In addition, its climate and large areas of fertile land lend themselves favorably to agriculture. Nigeria’s economy has benefited from strong commodity prices; it is estimated to have grown 7.4% in 2010 and is forecasted to grow 7.4% again in 2011.[6] The highly-anticipated Nigerian presidential election may be seen by many as a measure of the country’s progress and stability despite the clashes and unrest running up to the election. Our local sources remain confident about the elections overall and are not expecting any significant derailing event. We share this sentiment for the most part, given the current positive economic environment, fueled by high oil prices, as well as more tangible reforms in the country. Moreover, banks in Nigeria are particularly interesting. In our view, the government’s recent bailout of banks has made the nation’s bank stocks cheap, creating some very interesting investment opportunities.

I also see a lot of potential in markets such as Ghana and Kenya. Ghana was the first sub-Saharan country in colonial Africa to gain independence. Although it endured an extended period of military rule, a new constitution and multi-party politics were introduced in 1992. Currently, Ghana is seen by many as one of the most politically stable democracies in sub-Saharan Africa. We are excited about the prospects for consumer-related sectors in this market, given its relatively young and dynamic population of more than 20 million.[7] The country is also rich in natural resources such as oil and gold. Oil production in the offshore Jubilee field commenced in December 2010 and is likely to make a significant contribution to the country’s economic growth going forward. Of course, related investment in infrastructure is also likely to require financing, so we are looking closely at the financial sector as well.

The Kenyan economy appears to be doing well at the moment. The post-election violence in late 2007 and early 2008 took many by surprise, but it culminated in the establishment of a coalition government and the adoption of a new constitution in 2010, creating a solid foundation for future stability and growth. Kenya’s position on the east coast of Africa allows it to act as a hub for trade and investment flows from the east into the rest of the continent. Exports, predominantly tea and horticultural products, have recovered strongly, and the tourism sector is also seeing a strong rebound in the form of incoming foreigners.

There are also many challenges to investing in Africa. In my next post, I will discuss these further as well as my overall outlook on the region.

Source: Mark Mobius, Investment Adventures in Emerging Markets, April 21, 2011.

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World Cup Fever in Africa

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The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

I’m sure a number of you have been keenly following the World Cup matches as they play out across South Africa. For me, even though I was sitting far away, the opening match in the awe-inspiring Johannesburg venue felt especially close to home, since we have an office in this city originally called the “Place of Gold”

We have been coming to South Africa for several years, and we also have a number of South African companies in our portfolios, so we rejoice along with the South Africans that they are hosts of the FIFA World Cup 2010. In our opinion, the country has many world-class companies that present good investing opportunities. These companies have capable management teams and many are expanding their international market share. Higher global demand for commodities, a recovery in domestic demand and the hosting of the World Cup should further support South Africa’s economic resurgence this year.

A number of sectors could benefit from the World Cup, most notably those related to infrastructure, tourism, retailing, media and telecommunications. This is the first time the World Cup has ever been held on the African continent. The fact that the World Cup occurs in South Africa could enhance the country’s image and improve the world’s perception of South Africa, as well as potentially attract more tourists and investors to the region.

While South Africa is by far the largest and most liquid of the markets in sub-Saharan Africa, we are now also looking at lesser-known markets in the African continent, including Nigeria, Egypt, Kenya, Botswana, Ghana, Morocco, and Tunisia. Liquidity is the key concern for most investors, so markets that are the most liquid could attract greater investment flows. While markets in some African countries are developing quite rapidly, we think they have a long way to go before their potential is fully realized. In the meantime, private equity investments present an alternative channel for direct foreign investment, which is needed as a starter.

We have also observed the growth of new markets in the region. For example, Libya, which I wrote about earlier, already has a stock market and is encouraging the privatization of state-owned enterprises—a development some other African countries are repeating. Nigeria, a large country with substantial natural resources, is quickly emerging as an interesting investment destination. It has the second-largest proven oil reserves in Africa, and in late 2009, surpassed Saudi Arabia as the third-largest supplier of crude oil to the U.S.

Indeed, Africa as a whole has some of the world’s greatest deposits of natural resources, and only a fraction of those resources have been tapped so far. It is not only Africa’s mineral resources that appear attractive but also its agricultural potential and the abundance of water that we think may decide the rise and fall of nations in the future. In addition, the continent has a young and growing population, and its people could improve their education and skills to become a major asset to expanding manufacturing and mining enterprises.

We believe the outlook for Africa is positive. It has stirred the interest of countries like China, India and other fast-growing emerging markets, which require increasing resources for their growing economies, as well as countries like Russia and Brazil, who look to expand their enterprises into global operations. South Africa, acting as a representative for the continent through the World Cup, has shown that it can host an international event to international standards, and we believe this bodes well for the region’s future investment prospects.

No matter who lifts the World Cup trophy on July 11, I believe it is ultimately Africa that has won the attention of the world. Long after the games are over, we will continue to keenly follow the progress of this promising continent.

Source: Mark Mobius, Investment Adventures in Emerging Markets, June 24, 2010.

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