Wednesday, October 21, 2009

Is there investment gold in the second scramble for Africa?

By David Campbell -Published: 19 October 2009
Posted in: HSBC

The first great scramble for Africa at the end of the 19th century was arguably one of the biggest catalysts for the formation of the UK investment industry, with ordinary investors keen to hedge the risks of the colonial adventure by pouring money into investment trusts.

More than 100 years later, a second scramble is under way. But unlike the first wave, this one excludes the historical Western powers, as Middle Eastern and Asian states secure their resource needs with huge bilateral deals on the continent.

The issue is contentious, with campaign groups in Africa and overseas accusing the continent’s governments of selling off huge tracts of land with few lasting benefits. China and other buyers are keen to portray the deals as ongoing partnerships.

Some of the foremost frontier market investors insist the trend is crucial to the next generation of developing nation powerhouses, however. So will an astute early-stage investment allow access to the next generation of entrants to the global economy?

The reasons for the trend are clear. Between 1980 and 2005 bilateral trade between China and Africa grew fifty-fold, according to research by the Journal of Politics and Economics in Africa. Trade grew more than four-fold between 2000 and 2006 from an annual $10 billion to $55 billion, and is expected to reach $100 billion by 2010. China has vast holdings and extraction rights across the south of the continent and is currently close to a deal with Nigeria on oil rights in the Niger Delta.

Alongside Chinese investment, Middle Eastern states keen to ensure food security have poured huge sums of oil money into purchases of arable land. Research by the Economist Intelligence Unit earlier this year reported that India had invested $4 billion in arable land in Ethiopia, while Egypt and Kuwait had secured annual cultivation and harvest rights to several million tonnes of grain grown in Sudan. Saudi Arabia was active across Africa, and Bahrain had put down a payment of $500 million on arable land in Turkey with the potential for up to $6 billion in further capital. Mozambique has leased more than 100,000 hectares to state-level investors, and this figure rises to as much as 2.8 million hectares in the Congo and two million in Zambia.

The perceived lack of immediate benefits for local residents made the deals potentially unstable and a source of possible political uncertainty, the EIU concluded, and fuelled nationalist suspicions the deals were thinly disguised land grabs.

Head of global investment strategy at HSBC Private Bank Fredrik Nerbrand said: ‘I wouldn’t use the expression land grab. But I would say this is very much something you would invest in on a minimum 10-year horizon.

‘This is something that we do play in the portfolios but it is something that we are investing in much longer term, in the expectation that a lot of the Chinese and Middle Eastern capital currently held in US treasuries will over time be taken out and invested in more productive assets.

‘We use an in-house fund [the HSBC Frontier Markets fund, managed by Andrea Nannini] that invests in emerging market agri-businesses which will be a key beneficiary of the trend. It also does some private equity style partnership arrangements with infrastructure companies. Obviously the liquidity is not what it is in developed markets so this is very much an idea you invest in and put away.’

The strategy came with the inherent political risks attached to investment in any frontier market, said Slim Feriani, managing director of Progressive Asset Management, a developing and frontier market fund of funds business.

He said the political sensitivity of land ownership and a chain of benefits that sometimes failed to reach local people made the issue a political hot potato that could face unilateral change by nationalist-minded authorities in the future.

But he added there was sufficient capacity and investment speciality in the market to diversify the risk of any single state reacting against a deal. ‘You have to remember that just a very short time ago these countries where in complete economic obscurity. Thanks to the resource boom we have started to see the emergence of a middle class.’

Feriani listed the AIM-registered PME Africa Infrastructure as a strong auxiliary play on state-level investment, providing exposure to the core road and port capacity building required to ship raw commodities from the heart of Africa.

Utilico Emerging Markets was another core play on the sector, offering a broader global remit, while a similar story was played by the Vietnam Infrastructure fund.

‘The overseas investment is leading to huge impacts in structural change and efficiency. The things we look for are like Tunisia, which has just announced $40 billion in infrastructure spending. We have 4% of the fund in there.

‘These are big numbers… sub-Saharan Africa has been showing a steady rate of 5% growth a year in recent years and we have certainly seen more trickle down. It won’t happen overnight, however – we are looking at these things over a very minimum of five years,’ Feriani said.