Africa is the place to go for the “frontier market investor” who is seeking a new investment venue with a high rate of return, says Donald Elefson, portfolio manager for the Harding Loevner Frontier Emerging Markets Fund, which invests the largest amount of its multi-billion dollar fund — about 33 percent — in Africa.
In a September 22 interview, Elefson said U.S. investment yields are at all-time lows, which can directly benefit emerging markets like Africa.
“I think you are seeing more and more people looking for return — be it yield or exciting equity-type opportunities — and that is where the frontier market [like Africa] is really coming to the forefront. … The frontier markets are going to be the biggest beneficiaries of the low interest rate environment that we have in the developed world,” he said.
Elefson recently told the U.S. investment weekly Barron’s that Africa offers “strong markets and huge potential.” Additionally, he said, people do not give Africa enough credit for confronting corruption — something that Elefson sees as a “generational” issue.
“When I go to Lagos, when I go to Nairobi, I see a lot of Africans who have been educated and have gained work experience overseas coming back home because of the potential that can be found there. They are a new breed. They are not like that older generation. They realize that you can get somewhere, you can accomplish things, without pursuing corruption. It is a new mindset. These are the new leaders. These are the Africans who will rise up and be the new leaders that will drive return on capital going forward.”
“I am speaking from the perspective of the investor, both what I do in terms of equity investments in companies listed on stock exchanges and companies that are not listed on stock exchanges but may in the future.” Elefson said that while his mutual fund only invests in listed companies, “I am a firm believer that the opportunity for both of those sectors is huge” Elefson told America.gov.
Elefson explained why as a portfolio manager he is so “bullish” (enthusiastic) about investing in Africa. “First of all, we have a historical precedent to argue our case in Africa, and that is seen in the markets of Brazil, Russia and China.”
“I have been investing in emerging markets for 20 years. When I started, China and Russia were not open. When they started to open in 1992 and 1993, we were pursuing investments there but people were laughing at us. They would say, ‘We would never do that. Russia is an ex-command economy, China is an ex-Communist economy.’ You have heard the story. But now, try to find one listed equity fund that does not have China or Russia in it. You would be hard-pressed to find one.”
A similar situation now exists in Africa, he said.
He pointed to the example of Brazil. “When I started investing in emerging markets, Brazil was the attractive emerging market but it was also the biggest economic and political basket case in the world: inflation was 1,000 percent, corruption was present; Telebras [the telecommunications company] was a state-owned company; Petrobras [petroleum] was a state company. In the past 15 or so years, Telebras broke up the telecommunications monopoly and hived off different individual operating companies; Petrobras is now owned by everybody” as a private-sector company. “So what I am saying is that if it worked in Brazil it can work in Nigeria.”
In Nigeria, he said, Nitel — the Nigerian Telephone carrier and its companion mobile phone company — are both state-owned. “They are in the process of being liberalized, privatized and sold off, just like Brazil. NPC, the Nigerian Petroleum Corporation, is a similar entity to what Petrobras once was, and that is in the process of being liberalized.”
“The difference is Nigeria does not have control of their offshore economics. Nigerian companies participate in a very low level of offshore exploration and production … so not only do we have an oil company that can be liberalized, but also one that has increased market and revenue potential when that offshore potential is realized. But that is just Nigeria.”
Looking elsewhere in Africa, Elefson compared Kenya to Mexico of an earlier time. He said Mexico “made its bones” (became an international investment opportunity) by becoming more closely integrated with the United States and its neighbors to the south.
“Kenya is a part of the East African Community, which is made up of five potentially high-growing economies [Kenya, Uganda, Tanzania, Rwanda and Burundi], and Kenya is the leader of the pack. So there are quality companies now in Africa that would pass anybody’s test on fundamental analysis. … I could go on and on with examples, but my argument is that emerging markets have allowed many countries that nobody ever thought would grow into investment destinations to grow, and the same thing, I believe, is under way in Africa right now.”
Elefson said all of the new African companies that are sprouting up across the continent realize one thing: “If we are going to grow, we need capital and we cannot depend on our government any more to give us that capital. … We need foreign investors,” who require the transparent reporting of numbers and results. “So it is foreign investors rising in status that is forcing the change or confirming the trend of change at the company level, and it is impressive,” he said.
Information is one of the biggest factors aiding the investment and development trend in Africa, he said.
“Right now, they just landed two undersea cables to the East African portion of the continent. Broadband prices could go down as much as 90 percent [below] what they were even two years ago. That makes broadband Internet, data over the cell phone, and data to the home much more affordable. That means a person with an idea, with an aspiration, can log on immediately and see what other people are doing,” he said. “They have Facebook, Twitter and all of this stuff. I don’t use them. I don’t like them. But they are wonderful conveyors of information. They are catalytic. So that is going to stimulate a whole new breed of entrepreneurs. It is going to change the gestation period of an entrepreneur from ‘This is an idea, let’s think about it for years’ to ‘I can see an example of this so maybe I can do it sooner.’”