africa – full of promise

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www.africanbusinessresearch.com [email protected] African Business Research Limited Africa – Full of Promise Presentation to the 11 th ASEA Conference Accra International Conference Centre 29 October 2007 Dr Ayo Salami African Business Research Limited 1-2 Universal House 88 - 94 Wentworth Street London Tel: +44 (0)20 7392 4058

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African Business Research Limited 1-2 Universal House 88 - 94 Wentworth Street London Tel: +44 (0)20 7392 4058. Africa – Full of Promise. Presentation to the 11 th ASEA Conference Accra International Conference Centre 29 October 2007 Dr Ayo Salami. Disclaimer and caveat. - PowerPoint PPT Presentation

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Page 1: Africa – Full of Promise

www.africanbusinessresearch.com [email protected]

African Business Research Limited

Africa – Full of Promise

Presentation to the 11th ASEA ConferenceAccra International Conference Centre

29 October 2007

Dr Ayo Salami

African Business Research Limited1-2 Universal House88 - 94 Wentworth StreetLondonTel: +44 (0)20 7392 4058

Page 2: Africa – Full of Promise

www.africanbusinessresearch.com [email protected]

African Business Research Limited

Disclaimer and caveat

This publication has been prepared by the African Business Research Limited (ABR) for information purposes only and is for the exclusive use of the recipient. We are not soliciting any action based upon the information contained in this publication. The material contained in this publication (i) should not be construed as an offer to sell or a solicitation to buy any security in any jurisdiction; (ii) is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Opinions expressed in this publication are current opinions as of the date appearing on this material only and the information including the opinions contained herein are subject to change without notice. ABR will not accept liability for any loss howsoever incurred by any person or financial institution due to any events or actions taken as a consequence of the preparation and dissemination of this document.

Page 3: Africa – Full of Promise

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Africa – moving from promises to results

“Africa is indeed on the move. In contrast with the 1990s, conflicts in Africa have declined, economic performance has improved and some clear ‘high performers’ are beginning to emerge.”

World Bank 2006

“Since 1995 there has been at least one African equity market among the top 10 best performing markets in the world. Last year (2006) Malawi was the best performing stock market in the world posting gains of 129% in US dollar terms. Joining Malawi in the top ten stock markets was Morocco (up 88%) and Botswana (up 55%).”

African Business Research

Page 4: Africa – Full of Promise

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Why invest in Africa?

Africa: A Lie by Omission

Page 5: Africa – Full of Promise

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The view from abroad : Misconceptions about Africa

Investing in Africa is risky

The region is a basket case that is politically unstable

Regulations are insurmountable

There are no investment opportunities

Page 6: Africa – Full of Promise

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Africa in Perspective:- Land mass and proportion of world’s resources

United States

China

India

Europe

Argentina New Zealand

China 3,705,390

United States 3,618,770

India 1,266,595

Europe 1,905,000

Argentina 1,065,189

New Zealand 103,736

11,664,680

Square miles

Africa 11,707,000

Resources

Land mass - 20%

Diamonds - 90%

Gold - 50%

Phosphate - 90%

Platinum - 40%

Petroleum - 8%

Natural Gas - 12%

Source: Academic Centre for Education Development

Source: Ayittey, George B.N. Africa Betrayed, 1993, Palgrave Macmillan , ISBN: 0312104006

Page 7: Africa – Full of Promise

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“Wind of change” blowing across Africa – declining political risk1980 2007

Democratic countries

Undemocratic countries

Wobbly Democracies

Source: African Business Research

Page 8: Africa – Full of Promise

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Africa population and GDP growth (ex South Africa)

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Population (grow th) Grow th in real GDP Grow th in real per capita GDP

Since 1995, Real GDP growth has

exceeded population growth

12 consecutive years of growth in real per capita GDP

Source: World Bank data

Page 9: Africa – Full of Promise

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Sound monetary policies ….

Budget deficts (Africa ex-South Africa)

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Def

icit

as

% o

f G

DP

25.0

30.0

35.0

40.0

45.0

50.0

Bu

dg

et d

efic

it (

US

$bn

)

Budget Deficit (US$ billions) Deficit Including Grants as % of GDP

Deficit Excluding Grants as % of GDP

Budget deficits have declined sharply since

1992

Source: World Bank data

Page 10: Africa – Full of Promise

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… have controlled money supply and reduced inflation

Inflation and money supply (Africa- incl South Africa)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Infl

atio

n (

%)

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Mo

ney

su

pp

ly (

%)

Year-On-Year % in price index Growth in money supply Ratio of money supply to GDP

Source: World Bank data

Page 11: Africa – Full of Promise

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External debt is becoming sustainable

External Debt Burden (ex South Africa)

200

220

240

260

280

300

320

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Ext

ern

al D

ebt

(US

D b

illio

ns)

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

85.0%

95.0%

105.0%

Ext

ern

al D

ebt

as %

of

GD

P

External Debt External debt as % of GDP Debt service to exports ratio

Source: World Bank data

Page 12: Africa – Full of Promise

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With a little help from our friends in ChinaAs the Chinese economic resurgence has proceeded, Africa has become more important for China as a source of the raw materials needed by the Chinese manufacturing sector.

African economies, in particular oil and commodity producers have benefited substantially from China’s demand for raw materials

The historical trade deficit with China’s has now become a surplus

Source: WTO Direction of trade statistics

0

2000

4000

6000

8000

10000

12000

14000

16000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

US

Dol

lar

mill

ion

s

China Imports from Africa China Exports to Africa

Page 13: Africa – Full of Promise

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Low correlation with other global markets offers diversification opportunities

Correlation matrix between regional equity markets

Africa AsiaEmerging markets Far East G7 Countries

Latin America

South Africa

World Index

World Small Companies

Africa (ex South Africa) 100%Asia -9% 100%Emerging markets -7% 88% 100%Far East -10% 99% 86% 100%G7 Countries 12% 18% 43% 17% 100%Latin America -14% 6% 44% 5% 57% 100%South Africa 3% 42% 58% 40% 22% 7% 100%World Index 14% 21% 46% 20% 99% 57% 24% 100%World Small Companies 14% 22% 46% 21% 90% 46% 28% 90% 100%

Correlation coefficients based on daily equity returns between 1/1/2000 and 29/09/2006

Source: MSCI, African Business Research

Page 14: Africa – Full of Promise

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African Business Research Limited

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

West A

frica

Su

b-S

aharan

Africa

Africa (ex-S

Africa)

East A

frica

No

rth A

frica

So

uth

ern A

frica

Ind

ia

Japan

Ch

ina

Asia

Far E

ast

Germ

any

Un

ited S

tates

G7 In

dex

Wo

rld In

dex

Eu

rop

e

Ru

ssia

Un

ited K

ing

do

m

Eastern

Eu

rop

e

Em

ergin

g M

arkets

So

uth

Africa

Latin

Am

erica

Brazil

Anybody heard of Sub-Prime?

USD Returns to various equity markets over the period 19 July to 15 August 2007

On July 19, 2007, the Dow Jones Industrial Average hit a record high, closing above 14,000 for the first time. By August 15, the Dow had dropped below 13,000 and the S&P 500 had crossed into negative territory year-to-date.

The correction in global equity markets following the sub-prime crisis had minimal impact on Africa

Source: MSCI, African Business Research

Page 15: Africa – Full of Promise

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-10%

-8%

-6%

-4%

-2%

0%

2%

4%

North A

frica

West A

frica

Africa ex-S

Africa

Sub-S

aharan Africa

Southern A

frica

Japan

US

A

G7 C

ountries

World Index

Europe

East A

frica

United K

ingdom

Latin Am

erica

Germ

any

Brazil

Far E

ast

Asia

Em

erging Markets

India

Eastern E

urope

Russia

South A

frica

China

Did you say something happened in China? Sorry we missed it!

USD Returns to various equity markets over the 2 week period 26 Feb to 9 March 2007

The sell-off in global equity markets following the correction in China in February did not affect Africa

On February 27, 2007, the Shanghai index plunged 8.8%, its biggest one day drop in a decade following rumors of the introduction of capital gains tax on equity investments. Over the next two weeks, most global markets followed with sharp declines.

Source: MSCI, African Business Research

Page 16: Africa – Full of Promise

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African equity markets – Great returns

Annual returns to African equity markets (ex – South Africa) over 1995 – 2006

-40%

-20%

0%

20%

40%

60%

80%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Average

-11%

24%

6%

-12%

28%

-28% -28%

-2%

65%

55%65%

11%

32%

Source: Local Stock Exchanges, African Business Research

Average annual returns of 13% (in US$) over the last 12 years from Jan. 1995 to December 2004, relative to 8% for SA, 6.3% for G7 countries and 6.6% for the All Global equities markets.

Page 17: Africa – Full of Promise

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Equity returns among the best in the world

Average annual returns to various regions (1995 to 2006)

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%E

aste

rnE

urop

e

Afr

ica

(ex

S.A

fric

a)

Latin

Am

eric

a

Sou

th A

fric

a

Em

ergi

ngM

arke

ts

G7

Cou

ntrie

s

Asi

a

Far

Eas

t

14%

14%

13%

8%

7% 6%

0.5%

-0.5

%

Source: MSCI, African Business Research

Page 18: Africa – Full of Promise

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-20%

0%

20%

40%

60%

80%

100%

120%

140%M

alaw

i

Mor

occo

Bot

swan

a

Ken

ya

Tun

isia

Mau

ritiu

s

Nig

eria

Uga

nda

Zam

bia

Nam

ibia

Zim

babw

e

Egy

pt

BR

VM

Sw

azila

nd

Gha

na

Avg

(ex

S A

fric

a)

Sou

th A

fric

a

129%

88%

55%47%

45%38% 35%

26%15% 13% 13% 12%

7% 2%

-1%

32%25%

2006 – Another vintage year

Average annual returns for 2006 of 32% (in US$), relative to 25% for South Africa, 29% for emerging markets, and 16% for G7 countries.

US$ Returns to African equity markets (2006)

Source: Local Stock Exchanges, African Business Research

Page 19: Africa – Full of Promise

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2007 – Looking good for your money

-10%

10%

30%

50%

70%

90%

110%

Zam

bia

Mal

awi

BR

VM

Nig

eria

Bot

swan

a

Mor

occo

Mau

ritiu

s

Nam

ibia

Egy

pt

Tun

isia

Gha

na

Uga

nda

Swaz

iland

Ken

ya

Zim

babw

e

Avg

(ex

S A

fric

a)

Sout

h A

fric

a

106%

92%88%

60% 58

44% 40%

29%27%

18%13% 11%

0% -5%-9%

36%

22%

US$ Returns to African equity markets (9 months to September 2007)

Source: Local Stock Exchanges, African Business Research

Page 20: Africa – Full of Promise

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0%

100%

200%

300%

400%

500%

600%

700%

800%

900%19

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Sep

-07

Cu

mu

lati

ve r

etu

rns

(%)

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

An

nu

al %

lo

ss o

n c

urr

ency

Annual % loss on currency Cumulative $ returns

Despite currency depreciation, cumulative

$returns are positive averaging 16%

Lose on the currency swing – Gain on the growth roundaboutEquity returns in US$ since 1991 (excluding South Africa and Zimbabwe)

Source: Local Stock Exchanges, African Business Research

Page 21: Africa – Full of Promise

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0%

5%

10%

15%

20%

25%

30%

35%

40%

Eastern

Europe

Far E

ast

Asia

Latin Am

erica

Africa (ex

S.A

frica)

Em

ergingM

arkets

South A

frica

G7 C

ountries

World Index

37% 34%34% 34% 34%

30% 30%

17% 17%

What about volatility? – “Give a dog a bad name”

Standard deviation of annual returns (1995 – 2006)

The risk from investing in Africa is similar to that of other emerging markets.

The perception that Africa is inherently riskier is not supported by data

Source: MSCI, African Business Research

Page 22: Africa – Full of Promise

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-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Eastern

Europe

Africa (ex

S.A

frica)

Latin Am

erica

World Index

G7 C

ountries

South A

frica

Em

ergingM

arkets

Asia

Far E

ast44% 42% 34%

30%30%

25%

17%

1%

-3%

Risk – Return Ratio: How “Sharpe” is that?

Sharpe ratio for Africa is 2.5x better than for emerging markets generally

Source: MSCI, African Business Research

Page 23: Africa – Full of Promise

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0

5

10

15

20

25

30

35

40

45

Asia

G7 C

ountries

World Index

Far E

ast

Africa (ex

South A

frica)

South A

frica

Eastern

Europe

Em

ergingM

arkets

Latin Am

erica

Nu

mb

er o

f lo

sin

g m

on

ths

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Ris

k o

f lo

ss

Number of losing months Risk of loss

41 4039 39

3836

34 32 31

You think I am a loser, wait till you meet my siblingsNumber of losing months (Jan 2000 to Sept 2007, 93 Months )

Risk of Loss for Africa is similar to other regions of the world Source: MSCI, African Business Research

Page 24: Africa – Full of Promise

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Historic Value At Risk – Always look on the bright side of life

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

World Index

G7 C

ountries

Africa (ex S

outhA

frica)

Asia

Far E

ast

Em

erging Markets

South A

frica

Latin Am

erica

Eastern E

urope

Lowest Monthly Return Highest Monthly Return

Outside the developed world, Africa has the lowest Historic VAR

Source: MSCI, African Business Research

Page 25: Africa – Full of Promise

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Spreading equity culture reflected in rising turnover

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

2000 2001 2002 2003 2004 2005 2006

An

nual

Tra

ded

Vol

ume

(US$

bil

lion

)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Tur

nov

er R

atio

(%

)

Annual Traded Volume Turnover ratio

Annual traded volume has increased by 4x since 2000

Source: Local Stock Exchanges, African Business Research

Page 26: Africa – Full of Promise

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0%

10%

20%

30%

40%

50%

60%

70%

Above $1 million per day Between $0.25m and $1million per day

Between $0.1m and$0.25 million per day

Below $0.1 million per day

Pro

po

rtio

n o

f to

tal m

arke

t ca

pit

lisat

ion

(%

)

2006 2000

32

8

64

1049 22

773

1140

Trading Liquidity: “I am a foreigner, get me out of here”

Daily Traded Volume for Africa (ex South Africa) There are stocks on the continent with reasonable trading liquidity.

32companies constituting 45% of the total market capitalisation trade more than $1 million per day.

Over 140 stocks trade more than $0.1 million per day

Source: Local Stock Exchanges, African Business Research

Page 27: Africa – Full of Promise

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Dynamics of economic reform

Cost of input

Exp

ecte

d O

utpu

t

Public sector output

Private sector output

Total output

Source: Olivier Blanchard; The Economics of Post-Communist Transition

X

Africa is just beginning to realise the benefits of the economic restructuring of the 1990’s.

Africa has had the pain, the gains are about to become evident

15 years ago, Africa would not have been able to cope with a doubling of energy prices. Despite recent doubling of oil prices few African countries have required balance of payments support from the IMF.

The continent is less vulnerable to external shocks.

We believe Africa is positioned here on the growth curve

Page 28: Africa – Full of Promise

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Would you invest in these countries?

A country recently endured a long and bloody civil war, the assassination of its president, a financial panic and an influx of poor immigrants

A country formed from the ruins of a vanquished army forced from its historic homeland to a small barren island

A country divided after a long and destructive civil war and still technically at a state of war

A country that started a regional war, suffered a humiliating defeat, heavy bombing that destroyed its infrastructure and without a history of civil liberties or democratic government

United States of America

Taiwan

Korea

Japan

Page 29: Africa – Full of Promise

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ABR: Who are we?

Mapping the African Business Terrain

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What do we offer

Unparalleled access to financial information on African equities

Data-base of over 8,000 securities quoted on 22 stock exchanges in Africa

Commissioned research – bespoke reports, in-house periodical reviews

Regional knowledge base and experience

Cutting edge research methodologies

Large contacts with African companies, investors and policy makers

Independence

Page 31: Africa – Full of Promise

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Website offering: www.africanfinancialmarkets.com

The website is divided into six section:-

• Company Analysis

• Macro-economy and Politics

• Pan African Equity Analysis

• Currency Exchange Rate

• Research

• News Archive

Page 32: Africa – Full of Promise

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Research - Africa All-Share (ex South Africa) Index

The Index is a composite measure of the average performance of all stock exchanges in Africa excluding South Africa. It covers all companies listed on African Stock exchanges (excluding South Africa) that conform to a minimum size and trading liquidity requirement.

Index segmentation

Size (Large, Medium, Small company indices)

Economic sector (Financials, Services, Industrials, Utilities, Natural Resources)

Geographic segmentation (East, North, South, West, Sub-Saharan Africa)

ABR calculates over 60 different pan-African equity indices

Page 33: Africa – Full of Promise

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Let’s start running

“Every morning in Africa, a Gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a Lion wakes up. It knows it must outrun the slowest Gazelle or it will starve to death. It doesn't matter whether you are a Lion or a Gazelle... when the sun comes up, you'd better be running.”

Page 34: Africa – Full of Promise

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Conclusion: ‘If you see a bandwagon, you have missed it”

Contrary to perception Africa offers significant growth and profit opportunities

Africa is still under the radar of most investors and hence offers great opportunities to the early adopters

Future equity returns from developed markets are projected to be significantly lower than historic levels

Spreading equity culture and rising trading volumes

Returns outweigh currency depreciation

A credible and peaceful future of the world in the 21st century must include a positive future for Africa

Development of efficient financial markets is integral to the alleviation of poverty