Investing in East Africa
By Peter C. Thoms, CFA
I traveled to East Africa last month to examine the investment prospects of several companies in the region that we consider to be promising. In this article, I will touch on the general investment considerations for East Africa; in subsequent articles I will delve into specific industry and company-level investment prospects.
Depending on whose definition of East Africa you use, the region, in the broadest sense, may include Burundi, Comoros, Eritrea, Ethiopia, Kenya, Rwanda, the Seychelles, Somalia, South Sudan, Tanzania and Uganda. For investment purposes, we at Africa Capital Group LLC think of East Africa as the five countries that make up the inter-governmental organization called the East African Community (EAC). The EAC members are: Burundi, Kenya, Rwanda, Tanzania and Uganda, and it is in these countries that we see the region’s most promising investment opportunities.
The EAC countries have a combined population of about 141 million people and aggregate GDP of approximately USD $100 billion. While there are still strong rivalries between these countries, they have generally recognized that it is in their collective economic interest to pursue improved trade relations, cross-border infrastructure projects and closer political cooperation. Talks concerning the development of a common currency and centralization of the region’s capital markets functions are ongoing, but, for now, we believe such advancements remain years away.
East Africa is one of the world’s fastest growing regions. Its GDP grew roughly 6.0% in 2013 and is forecast (by the U.N.) to grow by about 6.3% in 2014. While agriculture is still the single most important sector for the region, consumer services such as telecommunications and financial services are rapidly taking share of GDP. Thus, the electricity grid and transport infrastructure are also increasingly vital parts of the region’s growth equation as countries invest to provide for their rapidly growing and increasingly urbanized populations. Traffic snarls on the roads and bottlenecks at the ports and on the rail system make movement of goods slow and expensive. In fact, in our view it is this infrastructure development (grid, port, road, rail and pipeline) that holds the key to unlocking significantly higher economic output and living standards for the region.
Kenya has the most developed capital markets in East Africa, followed by Tanzania and Uganda. Rwanda has the smallest exchange, whereas Burundi does not have its own stock market. All of these markets are small and illiquid by developed market standards, but collectively they contain intriguing opportunities from a variety of industries, including telecom services, banking, insurance, energy, advertising, food and beverage and infrastructure.
While the region has attracted substantial interest from foreign companies of late, we believe East Africa’s home-grown firms hold the most investment potential because of their intimate knowledge of the local business environment. In particular, we believe dominant and well-managed local companies like Safaricom, Equity Bank, ARM Cement, KenolKobil, Bank of Kigali, CRBD Bank and Scangroup all offer interesting long-term growth prospects for investors. In future articles we will examine such companies in greater detail.