http://www.marketwatch.com/story/oil-crash-spooks-investors-out-of-africa-but-heres-the-silver-lining-2016-09-16?siteid=rss&rss=1
Oil crash spooks investors out of Africa, but here’s the silver lining
By Sara Sjolin
Published: Sept 16, 2016 11:17 a.m. ET
By
SaraSjolin
Markets reporter
The oil slump has punched the air out of the promising
invest-in-Africa story—but investors could be missing out on
double-digit returns if they don’t turn their attention back to the
continent.
Gathering for the FundForum Africa conference in London this week, top
money managers covering the region acknowledged that their African
investments have suffered since the oil crash in 2014, but they still
struck an upbeat tone for the decade to come.
And—paradoxically enough—the collapse in oil prices is one of the
reasons the fund managers continue to see potential in the continent.
“There has been an uplift for the consumer and the middle class from
lower oil prices. That has been a positive,” said Kay Ellen Consolver,
an advisory board member of African Power Corporation. “I think we’ll
see an emergence of other industries.”
Low oil prices “could also help on the corruption front, because
there’s less money to steal. This is an opportunity to take a step
back and address these issues with more transparency,” she said.
A continent—not a country
The fund managers also made a crucial point about investing in Africa,
which Western investors tend to ignore: It’s a continent of 54
individual countries and not just one big region you can approach with
one tactic.
That’s also a key reason you shouldn’t write off the entire area on
the oil-price drop, said Lanre Oloniniyi, director of corporate
finance at investment adviser Tranergy Capital.
“Oil prices have two sides of a coin to them. You have oil-producing
countries, such as Nigeria and Angola, who are suffering from oil
prices, “ he said. “But then you also have oil-importing countries
who, on the flip side, have seen their energy costs go down—countries
like Kenya, Ethiopia and Tanzania. They can now import some products
at a much cheaper price.”
A few years ago, Africa was hailed as the new growth market, with
investing guru Mark Mobius calling it the ‘emerging market’ story of
the next decade, for example. A rising middle class, rapid economic
growth and unprecedented political stability lured in global investors
looking for stronger returns than offered in other countries.
However, the region’s fortunes turned in 2014, when oil prices tumbled
and burned a big hole in the government budgets of some of Africa’s
biggest countries, including OPEC members Nigeria and Angola. Crude
oil CLV6, -2.28% went from trading at around $107 a barrel in the
summer of 2014 to just above $26 in February this year. That slide
sent shock waves through global financial markets, particularly those
in Africa.
Reflecting this, the Global X MSCI Nigeria ETF NGE, -3.14% has lost
70% since the summer of 2014, while Nigeria’s currency—the naira —
NGNUSD, +0.000000% has tumbled around 50% against the dollar.
Countries less sensitive to oil prices have also suffered, as the
commodity pain started to spread more broadly through Africa’s
economies. Kenya’s NSE 20 index is down 41% since its peak in March
2015, while the broader VanEck Vectors Africa Index ETF AFK, +0.00%
has lost around 40% over the last two years.
“The worst is over”
At least it can’t get much worse than this.
“Oil prices are stabilizing. The worst is over,” said Josef Odili,
managing partner at Stonehills Frontier Investments.
Criticizing Britain's 2011 intervention in Libya, the U.K. foreign
affairs committee accused then Prime Minister David Cameron of lacking
a coherent strategy, one that eventually led to the rise of Islamic
State in North Africa. WSJ's Niki Blasina reports. Photo: Getty
Images.
“When you have this type of short-term crisis, you also get investment
opportunities,” he said. “Now you have an opportunity to invest in an
asset class for the long term, where you can have significantly higher
returns relative to the West, where you have close to 0%. The most
realistic number is about 10% nominal annual return on average on the
long term.”
But it’s important that anyone tempted to invest in African assets
understands that it’s an investment for the long haul, stressed Odili,
as did others at the Fund Forum gathering in London. As the oil-price
crash showed, the continent is volatile and will continue to face
political, economic and humanitarian crises.
A key concern right now is the sharp downturn in several African
currencies, including Nigeria’s naira and the South African rand
ZARUSD, +0.000000%
Oloniniyi explained that because of the devaluations some governments
may introduce capital controls to try to prevent money from gushing
out of the country. That essentially means foreign investors would
find their money locked in a country, leaving them unable to bring
profits home.
“Africa still remains a frontier market and with frontier comes
certain risks,” Oloniniyi said. “Investors have to understand those
risks and weigh them against potential returns. But I think it stacks
up.”
Received on Fri Sep 16 2016 - 13:17:23 EDT