 Hey, how's it guys this MJ students actually and in this video? I want to talk about the challenges of investing in Africa So what I've done is I've read this paper called investing in Africa a practical perspective for the South African institutional investor it's written by a company called investment solutions and They're a great company. Go check go check them out. They've got a cool YouTube channel And what they've basically done is they've written this whole report Which I've basically just taken the the graphs and I'm going to talk around the graph. So it's all of their work I'm just doing some sort of commentary on top of it so you can see here these are the authors and I mean one of the main reasons why they say you should invest in Africa They've given the full big reasons here is that Africa has strong growth rates. It's increasing its urbanization There's favorable demographics and there's a growing middle class Now what I want to do is focus more on the challenges or the risks associated with Africa and One of the first things I just want to mention is that in Africa. It's only Egypt Morocco and South Africa that are considered as Emerging markets the rest of the countries in Africa are Considered as something known as frontier markets, which means they're even more underdeveloped than the emerging markets So I thought that was that was quite interesting And yeah, yeah, we just can be going through these slides which which they've made and everything and Just can be pointing out some interesting things So first off what you can see is that? Developing Asia has performed the best in 2013 and 2014 in second place We do see Africa so Africa did come in second place So it does provide some nice, you know returns especially an environment where interest rates are very low in the developed world It's really cool that you can get some high returns by coming to Africa The other big benefit with Africa is the very low correlations if you look in the very first column Even just with say South Africa Morocco is only an 8% correlation with South Africa and Egypt only has a 6% So that is I mean that's really cool. It's really cool that you can find these low correlations So in a nutshell the big advantages of coming to Africa is that we offer some high returns Not the highest as just all the best, but we also offer a very low correlation Although correlation tends to dissipate, you know at extreme market events But while everything's running smoothly, we do have some nice low correlations Introduces great diversification benefits But what about the challenges? I think when people think of Africa the number one problem a lot of people think about is Corruption and I think if you see here South Africa we kind of like we're with the global average We're like average when it comes to corruption But if you look at all the countries that are really bad or have a lot of corruption Somalia Sudan Chad Burundi Zimbabwe Equatorial Guinea and Gola Kenya Nigeria You can see they all have very very bad corruption scores Compared to say countries like Denmark Finland New Zealand and Singapore which have like hardly any corruption Another thing with with Africa is That you can see that when we look at say the bond market You know how much of the bond market is capitalized compared to the GDP you can see how how small we are So we have a very very small bond market South Africa You can see with government and corporate together. We're only making up 50% of our GDP Now compare that to Asia where they're at like 350% although I do think that number is A little bit exaggerated because it includes Japan and Japan, you know, it has got quite a crazy You know percentage of bonds to GDP Unfortunately, they didn't include America in this graph It would have been really cool to to compare America, but interesting to see how small Africa's bond market is now This does present opportunities. It means that the bond market does have room to grow whereas say Asia Yeah, you don't want to grow that bond market anymore than it is there In the next slide. I just put a bunch of all they had a whole bunch of bonds I went and wrote in the credit rating just so that I could help myself check it out Interesting things to see was how much over subscribed these things were. I mean, you can see 15 times oversubscribed in Zambia and For you can see the yields are actually quite low Considering the poor credit rating. So that I thought was quite interesting The size of the issues are quite small and it was quite interesting to read the purpose Interestingly Senegal who had the best credit rating had the highest yield But then they weren't telling the people what they were going to use their bonds for so that was a little bit dodgy Although even that one got a four times subscription This slide over here. We seeing which countries are seen as Being investment grade. So South Africa, Namibia and Morocco are kind of like your investment grades with Botswana being You know quite an upper to medium investment grade. We're gonna come back to Botswana a little bit later They've got something very interesting with their stock market But what you can see is that the rest of Africa that actually has been rated So you can see majority of it hasn't even been rated But that which has been rated is either highly speculative or speculative Which means it's not a very good match for your institutional investors say pension funds life insurers You know the really big big players in the market This next slide here is looking at say private equity Africa is the the blue block and you can see it's it's really really small. So Private equity in South Africa is very small The reason for this is that there's not that many private equity managers who have long track records in Africa And just jar it's really difficult to do business. We're gonna see a few more challenges later Whereas if you say China China's huge and Latin America is also doing doing very nice over there Next I wanted to show you the the amounts of companies that are listed on the various stock exchanges in Africa What you'll see is that there's not many There's not many companies that have been listed and that is a problem in the market It means there's not that many sectors to choose from Interestingly Egypt look how they had like over a thousand companies like back in 2002 And then ten years later they got completely wiped out I think the reason for that was like the Arab Spring But I don't know exactly was Arab Spring in 2012 or 2013 or when exactly it was But that is a big surprise how many Companies got whacked off that South Africa also saw a decline South Africa. We've got quite strict regulations Institutional vests tend to stay with the top 40 So companies actually don't find it that feasible to to list they rather look at private equity deals Where there's just less paperwork This next graph was a little bit confusing Because what we got in the blue is market capitalization in 2012 and then in the green It's the growth in the capitalization So you can see Uganda and Zambia had this massive growth But they're coming off a very very small base Interestingly enough Zimbabwe had like zero growth probably negative if this graph was showing it South Africa you can see we are the the biggest market with capitalization Although interestingly enough Nigeria was Reported to have been a past us last year and if we see Nigeria at this stage wasn't actually that big But they did have quite a nice quite a nice growth Also look at your countries like I said Morocco in Egypt. Those are your merging I think Nigeria is now considered emerging as well. I don't think it's a frontier anymore But I do stand, you know correction there If we look at stock market capitalization as a percentage of GDP This is showing like how developed the market is relative to its size First thing you should check out is how Zambabwe has been absolutely Smacked by a lack of leadership in their political arena So that's a very bad thing to see Egypt also saw a little bit of a smack But I think like I said that was because of the Arab Spring I was curious just to know why Ghana decreased. I wasn't expecting that from from Ghana I would have expected that to increase, but you can see otherwise Besides those countries that I've mentioned there is a little bit of increase except for South Africa So that's I think has reached that maturity I actually consider South Africa more is a developed country than emerging although it's kind of like a weird It is a bit of a weird hybrid between the two If we look at annual turnover as a percentage of market capitalization in 2011 Here you can see, you know, how big South Africa is with Egypt in second place surprising is Zambabwe is still there in third It was I really try to find out where USA and Japan was what this graph basically is saying is how Liquid these markets are so the one measure is to look at annual turnover as a percentage of market capitalization as an indication of liquidity so we can see South Africa is great liquidity Egypt has great liquidity and Zambabwe finally enough Despite this problem still has the third best liquidity in Africa followed by Tennessee of Morocco's there Kenya, Nigeria And then Mauritius that's very good for Mauritius being a tiny little island Their economy is done very nicely Speaking of how economies have been doing let's actually have a quick little look at how how they have all been jumping around I mean check Egypt Egypt did an absolute boom in like 2005 that is massive and then it just crashed or dreadful Zambia also has been incredibly volatile. It's up and then it's down Mauritius seems to be doing quite nicely as well Unfortunately, they didn't show South Africa because they would have been quite a cool country to compare Okay, this I just found this very interesting these are the exchange trading times But swine is only open for 45 minutes. That is insane only 40. It's like guys. We're gonna trade Okay, everyone make your trade make your trade like like you can't go to the toilet during that time because that's the only time You have all day to make your trades I thought that was quite quite interesting for those of you looking at saying what is BRVM What that is is that is an exchange that has a whole bunch of countries like Ivory Coast I think Tongos also in it a few countries around it They use one exchange which I think is a great idea rather than each country having their own little exchanges It makes sense to group them together Then I looked at it wanted to see why coming back to private equity what Causes managers to stay away from certain countries. I did have to Google what MENA was or MENA However, you pronounce that that's Middle East and North Africa It's interesting. So when you consider Africa, there's basically three parts of it There's South Africa, which people consider by itself Then there's sub-Saharan Africa and then there's North Africa Egypt, Morocco and Algeria Which they kind of consider more as to be the Middle East This it's weird how they've done it and not just, you know, Africa as a continent, but interestingly Managers don't think that there's too much too much competition in Africa They do feel that there aren't that many opportunities at the opportunities are too small And they they feel like entry valuations actually quite cheap. So I thought that was quite good Interestingly enough Brazil had a political risk of just 10% back in when was this 2013? Which if you've been reading the news lately, you'll know that Brazil has massive political risk at the moment So, yeah, I think the big the big things with Africa is is this lack of liquidity the markets are small They're very thinly traded. It's hard to pull your money out It's hard to put your money in especially when you're coming in as a big-boy investor of say an institution You know the pension fund or something like that the markets are too small. There's also currency volatility I mean the rand experiences that as well. It's jumping all over the place African currencies are the same they jumping all up around and this introduces another risk that is not necessarily matched to your liabilities Think if you're a pension fund and you're paying out in US dollars, you don't want to be exposed to all the African currencies Political uncertainty again, that's a big one in in Africa Some countries are moving towards, you know better democracy, but they're still poor human rights in a lot of countries There's some presidents who've been like president for 30 years, you know There is like a lot of revolutions and coups and all that type of stuff happening There's also a lack of transparency because a lot of these markets are quite new their regulations aren't necessarily up to international Standards or they're written in different languages. So the transparency is still an issue in in Africa Like we said the bond market You know having all of its issues. It also still has poor credit rating and is not suitable as an investment grade Interestingly enough when it comes to Africa and you only like let's say you invest in Africa And you're like how did I do compared to everybody else? They don't actually have a standard benchmark. So there's a whole bunch of benchmarks But some include South Africa, but then if they include South Africa it makes up like 80% of the benchmark So they take South Africa out, but then Nigeria counts for like 50% of the benchmark And then some of them try to cap it and some of them include Egypt Some of them are like no Egypt's not in Africa and in benchmarks are absolutely stuffed up in Africa Like no one really knows how to measure the benchmark Which means when it comes to performance fees or seeing how you did to your competitors It's very very difficult. It also means a passive investment strategy is Difficult to take in on Africa, which means you have to go active which increases Fees, but how do you work out performance fees? It's just it's just a mess There also isn't really a derivative market in Africa. There isn't South Africa But for the rest of Africa you're kind of exposed to the currency risks and defaults in all of these type of things In your more developed markets, you know You can just go and say I want to you know want these derivatives want these little options with these little futures And you're all fine and everything's hunky-dory in Africa It's kind of still like the wild in these financial markets You're exposed to these risks and it's very difficult to hedge them out Then I just want to look at a few more challenges that the paper brought up They you know said poor productivity and higher labor costs I think that's when you're comparing it to to Asia, which has very high productivity and very cheap labor costs They said also Africa has poor public health systems, which means as an investor You don't really want to like be spending too much time in these African places because you could get like Ebola or these diseases And there's not really good doctors there So it's a risk for your own personal safety when you go as an investor into these places And you do want to do that for due diligence and all of that type of stuff There still is also a lack of education and skills development Which means if you invest in the company and it is doing well It's very difficult for that company to grow and hire other people because there's no one really of that skill So I'm hoping you're more and more but that should increase in time people You know education I think is is an upward trend Lack of access to finance I mean Africa doesn't have you know like in Europe There's these massive banks that have got lots of money and they can flood the the market with liquidity and finance all these projects Africa doesn't really have that many big banks or access to that type of finance Africa like I said, there's a lot of government bureaucracy and hindrances I mean in South Africa we have this thing called BEE Which just makes investing a lot more complicated for foreign investors They now have to learn these new regulations and these new rules Yeah, governments do make Yeah, like I said, but the political leadership in Africa is not that good and they do get in the way of business Africa is also exposed to if interest rates would rise in the developed world Then that that takes away like the whole incentive of coming to Africa So at the moment a lot of people are coming to Africa because it's a chance to get these high returns Which they can't get in their local markets But if interest rates increase back in their local home markets, then yeah, they're gonna be like cheers Africa You know, we don't need you so that is a big a big risk Again corruption I've mentioned before but it's worth mentioning again Africa Still has corruption issues High default risk. I mean Mozambique defaulted on its bonds earlier this year. I've recosed I think defaulted back in 2013 around there So I mean bonds are supposed to be the safe instruments and they are Experiencing high defaults and you saw that the returns they're high, but they're not that high I mean, it's like between five and nine percent and you know, these cars are actually defaulting So that is a risk not to be underestimated Like I said, regulation requirements are a nightmare Africa is not one country like everybody see things seems to think it is Each country will have its own rules its own regulations its own languages and to try and get around all of that or understand it You need a lot of lawyers and oh, it is quite quite difficult Also capacity constraints in the smaller markets If you are coming in with a billion dollars and you want to invest it You are going to be shifting the market the market will not have Capacity to take on such a big investment Which kind of then if you're an institutional vest It doesn't really make it worth your time to just put a little bit of money into Africa You know seeing all the information and knowledge that you have to get around the political and economic factors affecting the local markets Then you also have sector concentration. So if you do manage to get into the markets There's only like three companies really like there's telecoms There's mining's and there might be a banking share, you know, there's not that much Choice within these markets that you're actually getting Like you get in the developed markets develop markets They've got so many shares in the African markets. So there's still just a few it's just the big companies Like I said telecommunications is quite a big one But I think let me just nail this back in the biggest issue though is the lack of liquidity and It's a mismatch for a lot of institutional investors and it does, you know, bring in a lot of risk Liquidity liquidity liquidity if that's the one thing you remember from this video is remember that Africa does have a liquidity problem Anyway, I just wanted to end off this video with a little picture of Africa The people try to say that a misconception of Africa is that we're very commodity based and they'll try to show that a Lot of our GDPs are made up of different things So you can see in Egypt and Kenya and South Africa Services make up a much bigger chunk than resources Agriculture is also important and so is manufacturing In a whole bunch of these economies But anyway, that's that is the end of the video. We've come in at under 20 minutes Please give me a like if you enjoyed this video and I'll make more types of videos like this if you enjoyed it Thanks guys. Let me say goodbye. Cheers