Africa offers possibility of substantial upside, says Tanna
The spending power of Africa’s consumers is a vital theme that IR teams must emphasize to investors, to judge by our latest interview. We made contact with Sonal Tanna, joint fund manager of the Africa Equity Fund run by JPMorgan Asset Management.
Four of your top 10 stocks are in the consumer staples sector. What are the most significant attractions of the sector?
Africa offers the possibility of substantial upside through unexploited new markets, regional structural change and growing domestic consumption linked to extremely favorable demographics. This view drives our portfolio positioning.
Africa’s population growth remains the highest in the world at 2.4 percent every year. The continent’s population is expected to increase from 1 bn in 2010 to 2 bn by 2040, thus overtaking China and India.
The result of this growth is that Africa is expected to house the largest population in the world, which creates interesting multi-year investment opportunities as young workers look to spend their earnings.
All this implies huge potential for growth in the consumer sectors; consequently, we see very good earnings growth potential for these stocks.
How will income patterns and demand change in detail?
Income patterns are changing across the continent: Africa already has more middle-class households (defined as those with incomes of $20,000 or above) than India.
In 2000, roughly 59 mn households on the continent had $5,000 or more in income, above which amount they start spending roughly half of it on non-food items. By 2014, that number could reach 106 mn.
Africa’s rising consumption will create more demand for local products, sparking a cycle of increasing domestic growth. Nigeria, our largest overweight in the fund, is Africa’s second-largest overall economy after South Africa.
Specifically, given its large population of 160 mn – which equates to nearly one in five sub-Saharan Africans – the country is the clearest case of a newly emerging consumer market in Africa, with a rapidly expanding urban middle class.
What are the key facts about Nestlé Foods Nigeria, Shoprite, Nigerian Breweries and Tiger Brands?
The investment case for Nestlé Nigeria is based on having a large market share in products that form a daily part of the Nigerian food cupboard. For example, the Maggi range of stock cubes, soups and sauces has an 80 percent market share.
This is a company of high quality with strong brands, significant brand market shares and good technical management. In addition, investments in factory infrastructure and owning its own source of energy have secured future volumes and therefore growth.
Tiger Brands is a strong South African fast-moving consumer goods franchise whose foods have high brand equities, which allow for the generation of healthy margins and strong cash flow. We expect the strategy of expanding in Africa to be the key driver of value creation.
At Nigerian Breweries, the investment thesis is based on its strong brands and expanding demand for its beers through population growth.
The environment for consumer goods in Nigeria is exceptional, given that real GDP is trending at 7 percent a year, there is a population of 160 mn with an expanding youth, and growing urbanization.
Per capita beer consumption is 10 liters per annum compared with 141 per annum for Africa, and 221 globally. The beer market is forecast to grow faster than real GDP, much as consumption is growing faster than GDP overall.
Shoprite is Africa’s largest food retailer with a high volume, low-cost business model that allows it to offer cheaper price points than its competitors.
This is a key competitive advantage that is expected to be sustained over the medium term due to Shoprite’s advanced central system of distribution and market-leading share: it has the highest market share in sub-Saharan Africa, at 34 percent.
What are the major risks for investors in consumer staples companies, and how are they mitigated?
While Africa is filled with potential, it does not come without risks. These include corporate transparency and weak regulatory frameworks, as well as low liquidity, and they must all be considered when investing in these companies.
Our JPM Africa Equity fund follows an investment process that has been developed for investing in emerging markets. This is founded on fundamental, bottom-up stock selection and repeated company contact.
Our portfolio managers, research analysts and macro analysts gather first-hand insights into companies and markets, including smaller sectors where reliable quantitative information is not readily available.
Company visits form the cornerstone of our information gathering, and repeated contact with corporate decision takers provides key information.
We pay particular attention to governance issues, given our long holding period and the fact that we are invariably minority holders alongside private founding shareholders.
