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Growing investments in Africa: telecom and oil

May 24, 2011

By Aaron Pressman
The opinions expressed are his own.

Political upheaval and commodity price volatility have posed a big challenge for investors in Africa so far this year. Both the Market Vectors Africa ETF, which owns 50 of the largest stocks based on the continent, and the SPDR S&P Emerging Middle East & Africa ETF, which holds 139 stocks, have dropped about 7 percent in 2011 versus the 1 percent decline in broad emerging market indexes.

Fund managers who focus on the region say that there are plenty of opportunities that go beyond the simple commodity plays dependent on high gold prices. They’re looking for companies benefiting from the spill-over effects of the commodity boom and the long-term development of the growing African middle class.

“It’s the old story that there is money to be made in selling picks and shovels rather than in digging,” says Daniel Broby, chief investment officer at money manager Silk Invest in London. “There is a rush for resources in Africa but the investable theme is firmly centered on the consumer story that benefits from it.”

Larry Seruma, who runs the Nile Pan Africa Fund at Nile Capital Management in New York, also sees value in local companies benefiting from the longer-term trends.

“Of course rising commodity prices have been a big story for Africa for 10 or 15 years,” he said. “But the real growth has been driven by liberal, pro-market economic reforms and the consumer story.”

In contrast to the long-running authoritarian regimes in parts of North Africa that are now under attack or have already been overthrown, most of sub-Saharan Africa moved towards greater democracy and economic freedoms in prior decades, he says.

Seruma’s fund, which has gained 17 percent over the past year, is the only actively-managed U.S. mutual fund solely focused on Africa.

The region has 52 cities with at least a million residents, offering more opportunities to tap concentrated consumer markets than even North America, he points out. “It presents a compelling consumer base that can’t be ignored,” he says.

One favorite is MTN Group, the South African-based operator that serves customers in 21 countries including Nigeria, Ghana and Sudan. The company’s most recent quarterly results suffered as political struggles and violence in some markets depressed revenue. But Seruma said MTN remains a great long-term bet. “The total number of mobile subscribers in Africa is already more than in the United States,” Seruma said. “But mobile penetration is only 37 percent of the population so the potential growth is still tremendous.

The company’s shares trade in ADR form on the pink sheets in the U.S. under the symbol MTNOY. The stock is also among the top holdings of the Market Vectors and SPDR African ETFs.

Silk Invest’s Broby is looking for companies that benefit indirectly from the commodity boom like Ghana Commercial Bank. The big multinational oil companies are ramping up exploration efforts off the West coast of Africa and hiring lots of local workers who will deposit their pay with the Ghana bank.

Like Seruma and many investors in emerging markets, Broby also likes mobile telecom carriers such as Safaricom in Kenya. Mobile telecom providers not only leapfrogged the scattered offerings of land-based carriers but are also creating a whole new platform for commerce via phone, he notes. “There is more than enough opportunity in Africa to go around.”

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