Mobiles transforming Africa but it is still a frontier market

25th July 2011

Here Observer correspondent Killian Fox charts the rise of MobileMoney in Uganda. He writes: "Uganda's largest telecom company, MTN Uganda, created its own version, MobileMoney, in March 2009. Within a year, 600,000 Ugandans had signed up. Now, thanks to aggressive recruitment drives to win more subscribers – MTN agents trolling the streets for new customers are known as "foot soldiers" – the service has more than 1.6 million users."

"MobileMoney outlets are everywhere in 2011: the distinctive canary-yellow buildings and kiosks that house them are dotted around not just Kampala but the greater part of the country. The MTN network reaches 85% of Uganda, and MobileMoney is available everywhere MTN has coverage. Many of the villages I travelled through, however minor or remote, had at least one tell-tale splash of yellow."

Here Investing Daily runs an interview with an African fund manager Larry Seruma who gives the business case.

"There are several compelling reasons why investors should include African exposure in their portfolios. The No. 1 reason is that there are extremely compelling valuations to be found in Africa. The average price-to-earnings multiple in the universe is about 8, compared to 16 for the S&P 500. This ratio is also extremely favourable when compared to other frontier and emerging markets.

"The other reason is historical performance and return. Over the last decade, the African market produced an annualized return of about 14 percent compared to 7 percent for the MSCI Emerging Markets Index. On top of that, Africa experienced much lower volatility compared to the broader emerging markets"

He also cites the huge resources available and, lastly, demographics a young population with more phones than the US and a growing middle class.

Yet African remains a frontier market. For example here Neville Isdell, chairman of the Investment Climate Facility for Africa, writing on the FT's Beyond Brics blog argues one of the keys to growth is an improved system of commercial law across the continent though as he notes things are getting much better.

 "Tangible improvements to commercial legal systems by the governments of a number of African countries, including Mali, Rwanda, Tanzania, Sierra Leone, Burkina Faso, Mauritius and Zambia, are grounds for significant optimism.

"In many cases this reform is significant and already delivering direct benefits to businesses and investors. For example, in Rwanda, a partnership between the Government and ICF has led to the establishment of a dedicated commercial court system where none existed before."

Back in February the Toronto Globe and Mail noted the interest of huge global corporations in the continent too. It reported: "Multinational companies are positioning themselves for good things ahead. Coca-Cola Co is betting big on the region, with plans to spend $12-billion (U.S.) over the next decade as it adds beverage plants to take advantage of rising disposable incomes.

"Wal-Mart Stores Inc agreed to buy Johannesburg-based Massmart Holdings Ltd. in September for $4.6-billion, giving the U.S. retailer access to 288 stores in 14 African countries. While that might not be a huge amount of money for the world's largest retailer, it nonetheless signals that companies can no longer afford to overlook Africa."

However most financial advisers suggest investors should remain wary and emphasise that outside of South Africa, much of Africa constitutes a frontier market not an emerging one.

Last year, the Independent carried an article on the subject. It quoted broker Chelsea Financial Services Darius McDermott saying: "We consider investing in a single country fund on the African continent 11 out of 10 on the risk scale," says Darius McDermott, from independent financial adviser (IFA) Chelsea Financial Services. "South Africa may be Africa's powerhouse, but it can be as brittle as some of its neighbours' economies. There is certainly scope for growth over the next 10 years versus the developed markets, but any investment should be a very small proportion of an overall portfolio."

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