Africa is the most promising investment destination of the next 20 years. And it won’t be foreign development aid or Western generosity that makes the continent boom, but rather the doggedness and ingenuity of its own people. As an investor, you want to be part of this megatrend by owning shares of some of Africa’s world-class companies.
I’ve made no secret of the fact that I’m a major Africa bull over the long term, and I’m serious when I say that “Africa is the new China.” With Chinese labor costs rising and with India a chronic dysfunctional mess, the African continent is the only large geographic bloc with the potential for “Chinese-like” growth in the decades ahead. It’s the last major investment frontier.
African growth is real. Per-capita GDP has more than doubled in the past decade. And according to Deloitte, 7 of the 10 fastest-growing countries in the world are in Africa. The Economist noted last year that “Lion Economies” such as Ghana and Rwanda are reminiscent of Asian “Tiger Economies” South Korea and Taiwan at an earlier stage of development.
Importantly for my investment thesis, Africa is developing a robust middle class for the first time in its history. According to estimates by the African Development Bank and the World Bank, Africa’s middle class is already well over 300 million people, or about a third of the population. It’s a block of consumers comparable in size to the middle classes of China and India. More conservative estimates put the number closer to 120 million people, but we don’t need to split hairs. Whichever estimate you use, we’re talking about a lot of consumers.
Of course, not all African consumers spend their days sipping lattes and playing on iPads. Africa is a frontier market in the truest sense of the word; much of the continent is at a very low level of development. But the companies investing there today are the ones that will deliver a massive payoff for their investors down the road.
In his history of the world Why the West Rules–For Now, Ian Morris writes about the “advantage of backwardness,” and the logic applies to Africa today. When you are starting at zero — and let’s face it, much of sub-Saharan Africa is about as close to zero as you can get — you have little in the way of sunk costs and legacy technology to deal with. You can leapfrog existing technology and embrace the new. Why would you invest billions of dollars stringing phone lines across your country when you can skip that step altogether and just build cheaper cell towers?
Looking at Africa today, you see the same pioneering spirit that defied all odds to settle the American West in the late 1800s. Consider the story of Liquid Telecom, a phone and internet infrastructure company based in southern Africa. Liquid has done something that no Western company would have the audacity to do: string fiber-optic cable from South Africa, through Botswana and Zimbabwe, and across the Zambezi river into Zambia, a landlocked country deep in Africa’s interior. All work had to be completed by day — using work lights attracts wild animals, you see — and a section of cable was dug up by elephants and had to be reburied. (These are not problems faced by Verizon (NYSE:VZ) or AT&T (NYSE:T), to say the least.)
Liquid, unfortunately, is not a publically traded company. But my favorite play on the rise of Africa most certainly is: South African mobile phone operator MTN Group (JO:MTNJ) trading in the U.S. as (OTC:MTNOY).
MTN Group can be thought of as Africa’s AT&T or Verizon Wireless. It is headquartered in South Africa, but it has more than 200 million customers spanning 22 countries across Africa and the Middle East. And roughly a quarter of its subscribers are from Nigeria, Africa’s largest economy — and one of its fastest growing.
Why invest in African mobile phones? Let me count the reasons.
The mobile phone is the single most important possession of the emerging global middle class. We may think of our phones as primarily a source of entertainment. But in much of the developing world, a mobile phone is a vital lifeline to the connected world, and even an important medium for money transfers. Africa will have its booms and busts along the way, but I do not see demand for mobile services abating anytime in the foreseeable future.
Looking at the fundamentals, there is a lot to like about MTN Group stock. Revenues and earnings are up by more than a third since 2008, a period in which growth has been hard to come by in most markets. MTNOY trades at a reasonable price/earnings ratio around 16 and pays a respectable, growing dividend currently yielding 3.8%. In the past five years, it has grown its dividend by about 40%. (Fair warning: Exchange rates can skew ADR payouts.)
Currency fluctuations are a problem, and weakness in the South African rand have been a major drag on the returns of U.S. investors. But here too, I expect to see improvement. The rand is one of the cheapest currencies in the world, according to the Big Mac Index. U.S. investors should get a nice one-two punch in the next year: a rising stock price in South Africa combined with a rising currency value should make the U.S.-traded ADR shares a solid performer.
It’s time to ring up profits in MTNOY — this ace performer is ready to take advantage of the last great economic frontier.
Disclosure: Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management.