Nigeria debate: Nigeria leads the continent

JP, Morgan Stanley The things that have helped drive the story – aside from oil – are increased stability, corporate earnings growth, greater transparency and, maybe most importantly, a strong local stock market with an established equity culture. The analogy I use is India in the middle of the 1990s, where there was an established equity culture – both retail and an evolving institutional environment – as you have in some countries in Africa, notably Nigeria and Kenya – whereas a number of other emerging markets are still nascent in this regard. In Nigeria, the strength of the banking sector, as well as the energy story, has been of particular interest to investors.

Investment in sub-Saharan Africa has only just started spreading out. A year ago, the list of investors we would go to internationally would have been pretty small. Now it’s growing very fast. It’s not just a hard core of people in London with a couple here and there in Europe, the interest in these markets is a lot broader now; and there’s interest from the Middle East, emerging Europe and east Asia now.

There’s a group of investors who have been investing in Africa for a very long time, and they don’t need any education on the Africa story. And then there’s a new group emerging of investors who are starting to look at the market. Now pretty much every major investor either has, or is looking at, developing an Africa strategy.

But the strength really comes from the domestic markets. If you look at the Safaricom IPO in Kenya in which we were involved, the foreign tranche was six times oversubscribed because investors saw value in the economic fundamentals of the country, the strength of the domestic market and a terrific company. The real blowout stat for me, however, is that there were over 750,000 retail applications from the domestic market, substantial oversubscription of the institutional portion from accounts across East Africa – and from a markets perspective there’s something fundamentally very healthy about the fact that international investment has been something of a sideshow, rather than driving it. This is really about these markets emerging from within, rather than outside influences coming in and showing them how to do it.

SC, Exotix I agree. African economies have been steadily improving for the last 15 years and, in my opinion, the turning point has been a combination of higher resources prices, a growing middle class driving consumption and an improvement in governance. Debt relief has also played a part in improving the financial landscape. These factors in turn have seen many African stock markets outperform the MSCI and emerging markets indices. In addition, banking sector consolidation and reform in some markets has led to increased private sector growth over the past 18 to 36 months, awakening some economies and boosting others.

AS, FCMB Absolutely. One thing that has been crucial is the change in policy response from government. In Nigeria the turning point was the central bank’s demand for a better-capitalized banking system, but there have been other examples throughout Africa where governments have pursued reform and growth plans that are working.

BS, Helios Anurag is right about policy but for me a key point is that it’s the domestic markets that have driven the growth. In Nigeria for example, less than 10% of the stock market is held by foreigners – it’s not a foreign-led speculative bubble. And it’s not just about resources. Take Kenya – a country with no gold, no oil, no gas, no diamonds. The economy has been experiencing 6% to 7% GDP growth a year just on the back of good government policies, investment and consumer spending. Yes, I think Africa could lead the world in exporting agricultural goods, but there are also non-primary goods economies too.

LB, FCMB A couple of things spring to mind. First, look at the macroeconomic story. If you’d looked at Africa five, six years ago, you’d have found very few economies with single-digit inflation. Today, most African economies have attained that. The quality of macroeconomic policy and management has improved significantly, and that has been a major factor in encouraging investment, because a lot of investors take a top-down view of Africa. Something that’s very key also is the resilience of these economies to the nascent political infrastructure. We saw problems in Kenya earlier in the year and last year, yet in spite of that the currency and the stock market held. There was hesitation about Nigeria prior to the elections but you saw the stock market growing in spite of that: the NSE All Share Index grew by 74% between 2006 and 2007. And finally, another key factor is the emergence of home-grown businesses. Unlike some other emerging markets, this is not a story of multinationals coming in and dominating the economy. If you take the leading sectors in Nigeria, with the exception of oil and gas and perhaps breweries, almost every one is led by an indigenous player. That presents huge opportunities for investors, as well as for investment banks. Along with that home-grown drive for business, there’s also a very strong diaspora community moving back in numbers. So you’re now getting something that 10 years ago was quite rare in Africa, which is high-quality management in a lot of businesses with global exposure.