Few people think of Africa as one of the most promising emerging markets in the world, but that's because most people aren't paying attention to what's going on this massive continent, says Ben Shepherd of Investing Daily.
Gregg Early: I'm here with Ben Shepherd, Chief Investment Strategist of the newsletter Global Investment Strategist.
Ben, I had a question for you. With the state of the world these days-China seems to be slowing, Europe is imploding, the United States is still trying to claw its way out into a recovery period, and everybody else around the world seems to be in transition of some sort; Brazil or Australia-where are you looking these days?
What looks good to you? Is it still the tried and true, the hyper-growth in Asia, or are there other places you're looking? What is the hot place to go these days?
Ben Shepherd: At this point, I feel like investors really need to step outside of their box and their comfort zone, and look more toward the frontier economies, particularly those in Africa.
You know, when you talk about Africa, I think a lot of people have visions of sad-faced children in Sally Struthers' commercials, but the reality is Africa has really grown and matured just over the past probably five years.
You know, five years ago, half of the 54 countries that make up the continent of Africa were either involved in some sort of a hot conflict or had just ended a conflict. And then back in 2010, we saw the Arab Spring with, you know, the revolts and uprisings in North Africa.
When you look further south in sub-Saharan Africa, the reality is it's largely peaceful. There are quasi-democratic governments functioning in most of the countries, and that is drawing high foreign direct investment-particularly from China, which has committed to about $101 billion in investments over the next five years.
So, that's driving a lot of economic growth in the region. It's fueling the creation of a new consumer class, incomes are on the rise, and really the region is just looking very attractive, though I realize that's kind of counter-intuitive in this risk-averse environment.
Gregg Early: I guess I've heard that the United States is getting fairly involved as well. The military is moving into Africa because they're moving out of the Middle East to find new bases, and that means that more money is coming in, and people on the ground means that they're needing to have a consistent and legitimate government that functions. The American presence probably has a great beneficial effect.
Ben Shepherd: Yeah. In Somalia, the chronic hot spot, they're about to hold elections, and right now most political analysts are actually expecting a fairly functional government to arise out of that process. So, you know, long-term, the situation in Africa is settling down, and that's allowing Western interests to really get involved on the continent, particularly in the resource space.
One company that I've been following pretty closely is Tullow Oil (London: TLW). It's an English company; it's based in London. It's one of the largest Western oil companies operating in the region.
Tullow was actually the company responsible for finding the Nagmia 1 Field in Kenya last year. It's one of the largest onshore oil finds in about ten years. It also played a critical role in identifying the Jubilee Field off Africa's west coast, which is now thought to be one of the largest offshore oil reserves ever tapped. Right now, both of those fields are still largely in development, but the results are very promising.
Tullow has also been very strategic. It recently partnered with CNOOC (CEO) out of China-the third largest state-owned oil enterprise-to build a hub and transportation pipeline in Kenya and Uganda, which will:
- be a huge boon for the company, because it will allow it to more easily transport the oil produced from the Ngamia 1 Field
- it's also going to prove a very strategic alliance
China obviously has never been too concerned about doing business with pariah states, and it's actually the largest purchaser of Iranian oil. But, at the same time, China is very concerned about consistency of supply.
With a large military presence in the Persian Gulf and the tangled web of sanctions that Iran has been hit with, it has left China kind of concerned about how much longer they're going to be able to get Iranian oil. So they're looking very heavily to Africa, because they see that as a consistent source of cheap supply.
So by partnering with CNOOC, Tullow is not only helping build out its transportation infrastructure. It's also establishing a ground-floor relationship with a potential large purchaser of its future production.
Gregg Early: Where does it trade?
Ben Shepherd: It trades on the London exchange. While Africa is a very promising investment destination for American investors interested in investing in the region, right now you do primarily have to trade through London and Canada.
If you don't want to take that route, there is an excellent mutual fund; it's the Nile Pan Africa Fund (NAFAX). It's run by a fellow named Larry Seruma, and he is actually from the region. He spends most of his time on the ground in the region, and he's built up a solid track record of kind of tapping into emerging consumer trends that are being driven by Africa's very favorable demographic profile.
He's also done a very solid job of identifying potential commodity hot spots and investing in those areas where Western interests, and even domestic African interests, are beginning to exploit their huge reserves of natural resources.
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