Africa is one region of the world that is usually overlooked by most international investors, yet African equity markets have been enjoying a quiet revival, while most of the world's stock markets have continued to stall or decline.

Excluding South Africa, the rest of Africa has a population of 721 million and nominal GDP of US$400bn. There are 18 stock exchanges in the region and since 1995; there has been at least one African equity market among the top 10 best performing markets in the world. Last year (2003) it was Ghana posting gains of 144% in US dollar terms. Joining Ghana in the top ten stock markets was Kenya (up 112%) and Uganda (up 140%). In 2002, it was Botswana (up 33%) while in 2001; it was Nigeria (up 24%), Botswana (up 28%) and Malawi (up 25%). So far this year Egypt (up74%) and Ghana (up 150%) are strong contenders for inclusion among the ten best performing markets of 2004.

With future returns from equities in Europe and the US projected to be significantly lower than historical levels, we believe that Africa with the current trend towards a spreading equity culture is likely to enjoy a rising stock market and provide investors with significant positive returns.

Why invest in Africa?

The key attractions of African equity markets to investors include:-

Low correlation with other global markets offers diversification potential

As shown below, the correlation between African equity markets and other regions of the world is low and in some cases negative, offering opportunities for reducing portfolio risk and volatility. There is a misconception that the South African equity market is a reasonable proxy for the whole of Africa. However the South African market is already integrated with the developed economies and significantly correlated with virtually all other global markets, hence exposure to South Africa is not synonymous with exposure to the rest of Africa. Even within Africa, the correlation between equity markets in different countries is low, increasing the diversification opportunities within the region.

Correlation matrix between regional equity markets

	Africa All-share (ex S. Africa)	JSE All- share	FTSE All- share	NIKKEI -225	S&P 500	MSCI World
Africa All-share (ex S. Africa)	1.00
JSE All- share	0.03	1.00
FTSE All- share	-0.04	0.46	1.00
NIKKEI -225	0.04	0.30	0.21	1.00
S&P 500	-0.05	0.24	0.41	0.12	1.00
MSCI World	-0.01	0.41	0.66	0.34	0.89	1.00

Improving macroeconomic performance of the region

Despite having 7 out of the 20 fastest growing economies in the world, most outsiders still perceive Africa as a continent in decline, ravaged by wars, disease, famine, authoritarian governments, etc. This is a view that reflects media reporting rather than reality. Unbeknown to people outside the continent, most African countries have undergone a radical restructuring of their economic systems since the early 1990's. The macroeconomic fundamentals of the region are now sound and very encouraging. Real per capita GDP is rising, inflation is low, currency exchange rates are becoming more stable, and corporate profits & return on investment are relatively high. In our view, the continent offers private investors, significant opportunities for positive returns.

The political situation has improved and most countries now have a democratic dispensation.

The political landscape of Africa has undergone significant positive and lasting changes over the past 15 years. In 1985 37 out of the 53 countries in Africa had undemocratic and authoritarian governments. At present only 11 countries still have governments that came into office without due process. With political reform, it is reasonable to expect economic freedom and growth. We believe the journey to prosperity in Africa has begun. It is unfortunate that the focus on backsliding and setbacks in a few countries overwhelms the encouraging picture in the rest of the continent.

Expectation of future low returns in European and US stock markets

Given the poor performance of equity markets in most of the developed economies, there is an emerging consensus that future equity returns in developed markets are likely to be lower than historic levels. Investors looking for growth therefore have to move up the risk curve and are likely to find Africa a rewarding destination.

Lack of investment vehicles allowing foreign investors into the region

Investing in African financial markets poses significant challenges for the non-experts. Available information is spare and diffuse, while local regulations are varied and can be complex. If you are persuaded by the investment case for Africa there are limited opportunities for foreign investors to gain exposure to the potential available in African equity markets.

We are going to launch a fund (African Renaissance Fund) in the near future to invest in the equity securities of public companies listed on African stock exchanges (excluding South Africa). The fund will be an actively managed fund and will be open to both institutional and retail investors The African Renaissance Fund is one of the few investment vehicles allowing easy entry to African equity markets (particularly for retail investors).

Fund investment strategy and investment policies

The objective of the fund is to outperform the Africa All-Share (ex South Africa) index. Investments will be selected using a value management approach. The fund will seek to avoid capital losses that are permanent by focusing on companies that have demonstrated a track record of profit and where there is a very high probability that profits in five to ten years time will be significantly higher than at the time of making the investment.

We will undertake our own research and get to understand the company's products, competitors, markets, margins and cashflow. We will focus on easily understandable businesses that fall within our competence skill set. Our investment philosophy will be underpinned by downside protection, rather than upside potential. The companies in which we invest will have:-