Africa’s rise could be faster than China’s, says fund manager
IR Magazine sat down with Andrey Kutuzov, senior analyst at the Frontier Emerging Small Countries Fund and other portfolios run by Wasatch, the investment manager.
A clear majority of your stocks sell consumer staples or discretionary products. Which facts led you to take this route?
Three reasons: consumer companies can address both formal and informal markets, they tend to enjoy the least government interference, and the consumer-oriented business models tend to be the least capital intensive.
Informal markets are not reflected in formal GDP statistics. In many frontier economies, informal economies tend to be very sizable relative to formal economies.
Take Pakistan, where the informal economy is estimated to be larger than the formal one. Consumer-oriented companies, especially fast-moving consumer goods companies such as Unilever, can address the entire economic spectrum, informal and formal, which creates greater growth opportunities.
Frontier economies on average have a greater degree of state interference into markets through protective tariffs, quotas and government ownership, across all industries.
This makes it hard for investors to have long-term earnings visibility into companies operating in distorted markets.
Consumer products are the one industry where typically government involvement and regulation is highly limited, and this makes us have more confidence in long-term earnings potential.
Why did you make British American Tobacco’s Ceylon Tobacco your biggest stock?
Ceylon Tobacco is a high-return, low-risk investment with excellent corporate governance and great growth opportunity from rising incomes in Sri Lanka.
Corporate governance is top-notch as 84 percent of Ceylon Tobacco is owned by British American Tobacco. It enjoys 99 percent market share in the country where tobacco advertising is prohibited, which, in effect, blocks any competitor from launching a competing brand.
Locally listed subsidiaries of Heineken, Diageo, Nestlé and Unilever, to name a few, are five of your top 10 stocks, and they operate in Nigeria. Which facts show they are more attractive than their competitors?
Nigerian stocks form a sizable portion of our portfolio – approximately 17 percent in late September. We are very positive on consumers in Nigeria as the country has had 5 percent annual real GDP growth on average from 2005 to 2009, despite the global financial crisis.
The economy is also accelerating due to reforms leading to higher levels of foreign direct investment and consumer spending. More importantly, Nigeria has a good number of very high-quality consumer-oriented companies listed on the local exchange that are consistent with the types of investments we look for: high returns on capital, ability to self-fund growth, and top-notch levels of corporate governance.
Valuations are also attractive as the country has not enjoyed the level of foreign portfolio inflows seen in the larger emerging markets such as India or Brazil.
You say Africa has 1 bn emerging consumers, of whom 355 mn are middle income and Africa’s economic leap could happen more quickly than China in the past 20 years and Japan after the Second World War, given access to netbooks and cellphones. What are the facts?
In 1999 only 10 percent of the African population had mobile phone coverage while most countries lacked any mobile phone coverage.
By 2008, however, more than 65 percent of the African population had mobile phone coverage available, and mobile phone subscriptions have reached 376 mn people or one third of the population.
Some countries are approaching the point where 100 percent of the population is subscribed, such as Botswana and Gabon.
This kind of connectivity would not have been possible if fixed-line networks had to be built because of poor roads, vast distances and low population densities.
Such proliferation of mobile phones has resulted in drastically improved productivity in Africa – a major driver of GDP growth.
African economies are characterized by high contribution of agriculture in GDP ‒ agriculture comprises 42 percent of GDP in Nigeria, for example.
Mobile phones drastically improve productivity in the agricultural sector by saving farmers time and increasing incomes through better product prices: studies have shown mobile phone use reducing farm labor costs by up to 50 percent in Niger and improving profitability by 10 percent for banana farmers in Uganda.
Additionally, mobile phones are used as payment transfer platforms in rural parts of Africa thus allowing access to banking for parts of the continent where no bank networks exist.
This drastically increases the size of the formal economy and improves access to money in the informal economy.
In aggregate, studies have shown that each 10 percent increase in mobile phone penetration leads to increased GDP growth of 0.6 percent-1.5 percent.
Countries such as China and Japan lacked such catalysts in their phase of early economic development.
