Can domestic demand boost African markets? Duet’s Salami talks to Reuters Television

July 22, 2009

Direct and indirect foreign investors fled from Africa as the credit crisis sparked a flight to safety, or at least familiarity, but Ayo Salami, manager of the Duet Victoire Africa Index fund believes domestic demand can step in to underpin growth.


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Business operates best in an environment where information is readily available. In many Africa countries availability and reliability of the financial information is frequently inadequate and may not reflect reality. This is one of the biggest obstacles in conducting business in the equity market.Mr. Victoire states that domestic demand will be the driving force during this period of international economic difficulty. But as you very well know, the middle class of Africa, at least in Sub Sahara countries, is not that well developed and the size is not that significant. The prospect of consumer driven growth while possible to a certain extent should not be viewed as highly probable. In addition, there is a marked preference for products imported from Europe and America over those locally manufactured because of status conscience among the intelligentsia/the nouveau riche. On the other hand, the lower-end of the market is flooded with cheap imports and local producers can hardly compete in this market.The overall economic conditions of the countries do not support domestic demand-driven growth. In a region where some 60% of the population lives on less than $2/day, one can hardly assume this group to be the engine of growth at least not in the immediate future.Mr. Vicoire’s choice of investment sector, BBC and ITC is a very smart strategy. African banks are inclined to do trade-related transactions where fees for services tend to be rich and credit exposure is significantly controlled. However, there are two issues to consider in the banking industry: growth in non-performing credits and the recent statutory requirement for larger (primary) capital base.Breweries are expanding in Africa, and they all are profitable. This is one product that competes and wins against imports. The local drinkers seem to prefer the indigenous beer and they are consumed in all taverns. Cement is also a growing industry and is primarily driven by the exponential growth in construction. ITC business is exploding all over the continent and should be an attractive investment opportunity. Overall the investment strategy which focuses on BBC + ITC is a good one, but the reasons given may not explain the rationale for selecting them.The most promising catalyst for economic growth in the current environment is the export sector. Africa, in addition to the extractive industry, can focus on expanding export of agricultural and textile products. There are programs that provide preferential treatment for African products – like AGOA and ACP/ EU – and these arrangements should be exploited. In addition, the possible contribution of the African Diaspora should not be under-estimated particularly in the export market. Companies engaged in export businesses should do well in the next few years; perhaps Mr. Victoire may consider including them in his portfolio.

Posted by Alazar Dessie | Report as abusive

Alazar,Investment returns are higher when asymetry of information is high. It is the shift in mentality that is intersting to see: the middle class in Africa is small, but growing, and shifting its consumption preferences. Exports, incl AGOA, and exporting bananas to the EU are being taped into for a while. Most of those sectors are not listed, so that Victoire can tap into the opportunity. Also, there are lots of distorting factors, like quotas. Please remember that if minerlas have provided lots of liquidity to a number of African countries, it is the banking, breweries, cement and telecoms that are driving the growth. If you are able to point out an exporting sector, appart from extractive industries, where the growth is strong, and set to last, and the companies are listed,then I will agree with your thesis.

Posted by JMS | Report as abusive