• Sunday, December 10, 2023
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The hottest frontier


WHEN you are trying to keep a retail outfit afloat amid hyperinflation, it helps to have a sideline. “We had a business selling crocodile skins to Hermès and Gucci for shoes and handbags,” says John Koumides, chief executive of Innscor, a conglomerate based in Zimbabwe’s capital, Harare. The currency earned from this exotic export was a lifeline for the firm’s other arms, including its SPAR stores, when Zimbabwe’s shops were short of stock in 2008 as its currency collapsed.

Innscor survived. It remains an unwieldy mix of businesses even though it has shed the crocodile-skin enterprise. But it is attracting attention from investors seeking to profit from the emergence of a new class of African consumers: its shares have risen by 50% in the past year. The firm’s mainstay, and the bit that excites the most interest, is fast food, with brands including Chicken Inn and Pizza Inn. Its outlets are now in a handful of other African countries, including Nigeria.

Africa’s equity markets are hot, with investors attracted by the sub-Saharan region’s GDP growth rate of more than 5% over the past three years. The main markets in Nigeria and Kenya have risen by more than 50% in the past year (see chart). Over the past decade Africa supplied six of the world’s ten economies with the fastest growth. By 2020 more than half of African households will have enough income to splurge some of it on non-essentials, according to McKinsey, a consultancy. Furthermore, more than half of Africa’s population is aged under 20. Within three decades it will have a larger working-age population than China.

But Africa is short of savings and capital. That creates an opening for rich-world investors seeking a better return than is available at home. North Africa, tied to Mediterranean trade, is fairly well developed and is seen by some as a separate investment proposition. So is South Africa, the continent’s biggest economy, which has a slower growth rate than most of its neighbours and more mature consumer and financial industries.

The real source of excitement is the “frontier markets” of sub-Saharan Africa. “This is where the flavour is,” says Thabo Ncalo, who manages an Africa Fund for Johannesburg-based Stanlib. Small investors looking for a taste might choose to buy a stake in a mutual fund or one of the exchange-traded funds that mechanically track an index of frontier-market stocks.

Fund managers are mindful of the liquidity problems that forced the closure of New Star’s Africa Fund in 2009 barely a year after it was launched. Of 200-odd shares listed on Nigeria’s stockmarket, the largest of the frontier markets in sub-Saharan Africa, perhaps two dozen are liquid enough to make mutual-fund managers feel truly comfortable. A handful of big consumer firms that have been in Nigeria for a long time, such as Unilever and Nestlé, are listed locally and are liked by foreign investors. A local favourite is UAC, a food company with interests in paint and property, which has doubled in value in the past year. Its Gala sausage rolls are a popular snack and it is the local partner with Innscor’s fast-food outlets.

Beer companies are another way to gain exposure to the African consumer. Nigerian Breweries makes Star Lager and Legend Extra, a stout for those who think Guinness lacks punch. East African Breweries, listed in Nairobi and half-owned by Diageo, has similar appeal. Its combined market in Kenya, Uganda and Tanzania is more than 120m people, not much smaller than the Nigerian market of 167m.

Beyond Nigeria and Kenya is a big “liquidity cliff”, says Andrew Brudenell, who runs a frontier fund for HSBC. The next-largest exchange is Zimbabwe’s. Even quite large stocks can be hard to buy and sell on a given day. PZ Cussons Nigeria, an offshoot of the Manchester-based firm behind Imperial Leather soap, has an average daily turnover in its stock of $220,000, notes Mr Brudenell. But strip out the big blocks of shares that occasionally change hands and the stock churns $73,000 a day.

One way around the shortage of liquid stocks is to buy companies that have most of their assets or earnings in Africa but are listed elsewhere. Some mining firms listed in London and Toronto have most of their assets in Africa. The trouble with such stocks is that they are a gamble on commodity prices and the skill of a team of geologists rather than a bet on a broader story about Africa’s improving economy.

That is why some mutual funds prefer stocks such as MTN, a South African cellphone firm that makes a lot of its money in the rest of Africa. Shoprite, the largest grocery retailer in South Africa, is growing beyond its home base in South Africa and in a few years might similarly qualify for inclusion as a frontier investment. A concern for would-be investors is that mutual funds stick only with liquid stocks—even ones that look expensive—and miss out on small and local businesses, such as retail chains, that could turn into regional giants.

The public-equity pipeline

Some investors fret that the supply of fresh equity may fail to keep pace with the demand from rich-world buyers. Family-owned businesses are often unwilling to cede control by selling shares. A privatisation drive in Rwanda, which took off with the sale of the country’s biggest bank and of a big stake in its main brewer, has lost momentum.

Yet demand usually creates its own supply. “You can’t always put a lot of money to work very quickly,” says Clifford Sacks, the chief executive of Renaissance Capital in Africa. But patient investors can benefit from “liquidity events” when a chunk of stock is suddenly on offer. Ecobank, a Togo-based bank, raised $250m last year from PIC, South Africa’s state-employee pension fund, to buy Oceanic Bank, a Nigerian lender.

What is more, because liquid stocks