Video: Larry Seruma Sees Africa Becoming The Export Destination

The CIO of Nile Capital Management explains why investors are starting to 'get the African story.'

Video



Mike Norman, Hard Assets Investor (Norman): Hello everybody; welcome to HardAssetsInvestor.com. I'm Mike Norman, your host. Today we will be talking about investment opportunities on the continent of Africa. My guest is Larry Seruma, the chief investment officer and managing principal at Nile Capital Management. Larry, thanks very much for coming on the program.

Larry Seruma, CIO, managing principal; Nile Capital Management (Seruma): Thank you for inviting me.

Norman: So your fund focuses exclusively on the continent of Africa. Why don't you tell us a little bit about it and how you go about selecting investments there, what countries, etc.

Seruma: Yes. Our fund exclusively invests in the continent of Africa. We invest from Cairo to Cape Town. We are value investors. But we invest in all sectors. And we invest across the entire continent, meaning that we could invest in countries in the middle part, like Kenya, to the bigger countries, like South Africa, in terms of market capitalization.

Norman: Now your fund is a mutual fund, correct?

Seruma: That's right.

Norman: So you're actually buying shares in companies. And these are African companies domiciled over there, doing business in these various countries. How do you go about the stock selection process?

Seruma: We buy locally traded stocks. Or we buy or we own locally traded shares. And we buy companies we consider to be African stocks which would generate more than 51 percent of their revenue from the African continent. We are value investors. So our approach is to look at the fundamentals and look at the stocks, how they are priced, what the true fundamental value is. And that is really the overriding factor, how we end up owning any one company that ends up in a portfolio.

Norman: From a values standpoint, are there any particular countries that stand out right now, as excellent values?

Seruma: Yes. Nigeria does stand out as an excellent value proposition, both from a historical perspective and from a relative standpoint. If you compare Nigeria banks to, say, other emerging market banks, you see Nigerian banks are relatively valued well to these other banks.

Norman: Now, when we think about Nigeria, I think most people would think oil, right? And you're talking about the financial sector in that country.

Seruma: Right. Nigeria has about 3 percent of global reserves for oil. So the economy has a high sensitivity to oil. But also, Nigeria has 160 million people. So banking as a business has a higher potential in terms of servicing that population. So banks present a good investment opportunity in Nigeria.

Norman: Historically, though, hasn't the Africa theme really been about commodities and natural resources? And do you see that changing, now, more into just personal consumption over there—maybe the financial sector—as you were mentioning, consumer goods, infrastructure?

Seruma: Yes. Historically, Africa has been known for its natural resources. It has 50 percent of all global strategic reserves for resources. But what has happened over the last 20 years, as resources have gone up in price, is that many African countries have earned revenue from exporting resources. They are investing in infrastructure and they have increased the consumption of their middle class. So the middle class is growing on the continent. And as a result, you are seeing more consumption for consumer-related stocks.





Norman: What about political risk? We can't talk about Africa unless we talk about political risk, which has really been sort of the deal-killer in the past. Every time we got an increase in interest in Africa as an investment theme, you've had coups, you have had revolutions. How does the landscape look, in terms of political risk now?

Seruma: Africa is a very diverse continent, and a very large continent. You are talking about 54 countries. So, typically, when something happens in any one country, it's very easy to associate that with the entire continent. Say, for example, events in Egypt—more recently, events in Libya—could be construed to be the entire continent.

But there are many other countries in Africa that are politically stable. They have gone through elections in which they have changed government. A good example is Nigeria. Nigeria, 30 years ago, used to be governed by one coup after another. But over the last 25 years, we have seen succession through elections. So there are many other areas on the continent that are politically stable.

Norman: If Africa is an economically sensitive story—it's tied in with the global economy—wouldn't it just be easier for an investor to play some big cyclical stock, or some index that is economically sensitive? Why go to Africa?

Seruma: It is true that, in the whole world, Africa is not isolated from events that happen globally. However, if you look at Africa, the dynamics that make it grow are much more domestic. For example, domestic consumption is much more driven by internal dynamics. Africa does not export as much as places like China. So you find the growth is being driven by the things that are being done domestically.

If you look at Africa's financial banking system, African banks are not as connected to the entire global financial system. So you find they are insulated from shocks that happen in the financial system. So a lot of that has insulated Africa from some of the big macro events that really tie up or make the world much more connected.

Norman: You mentioned China. China obviously has been a major investor in Africa. What about the United States? What about Europe? Where do they stand, in terms of large companies here, for example, getting involved in Africa?

Seruma: Globally, China has been very important to Africa. China trade in Africa was about $5 billion in 2000. In 2011, it was about $170 billion. But all other countries are taking note of what is going on in Africa. Europe, the U.S., even places like Korea are looking to invest more into Africa than ever before. Part of the reason is driven by the fact that developed markets are experiencing low growth. And they are looking at alternatives for where they could export in terms of generating growth domestically. And Africa is becoming the destination to go to.

Norman: How has your fund performed relative to some of the major market indices?

Seruma: According to Morningstar, our fund is kindly ranked as No. 1 in terms of percentile rank, compared to the diversified emerging markets. So we are pretty much of the view that investors are beginning to get the African story, how robust it is. And they are beginning to recognize that growth and returns, at least for the foreseeable future, are likely to be more robust and coming from Africa than any other place in the world.

Norman: So when you say the're beginning to get the story ... Africa always seems like a very compelling story. But you kind of sound like you're saying they believe it this time. They are really getting involved this time.

Seruma: Right. This time, they are really getting that. They are getting it for three main fundamental reasons. No. 1, commodity prices are projected to stay at a high level for a long period of time. No. 2, developed markets are printing money. Developed markets have low growth. And developed markets are embarking on programs like QE3. What that really means is that capital flows are going to flow to Africa in a way they have never done before. So that is very sustainable. And I think it is very powerful going forward.

The third reason is the returns. You get higher risk-adjusted returns in Africa relative to developed markets. And those three forces will be sufficient to turn investors to invest in Africa.

Norman: Sounds like a very bullish story. And it sounds like this time we may actually see this play out over a longer period of time. And I really thank you for coming on the show. It's been fascinating.

Seruma: Thank you for having.

Norman: Thank you very much. That's it for now, folks. This is Mike Norman, saying bye-bye. We'll see you next time.

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