Be careful on this emerging markets play: Pro
Optimism on investing in Africa needs to be tempered-even if there's plenty of opportunity, according to a top money manager at AllianceBernstein.
"I am hopeful ... that we will see very strong growth in Africa over the coming decades and that that will translate into very strong economic returns for investors," Morgan Harting, a senior portfolio manager focused on emerging markets at AllianceBernstein (AB), said Wednesday at the FT Frontier Markets Summit in New York. "But I don't think either is a given, and I'm not sure investors are pricing that uncertainty today appropriately."
The key to investing in Africa is picking the right companies, Harting said. He noted a "mania" about the rise of the middle-class consumer leading some African stocks to be valued at 40 times earnings despite growing no faster than a European consumer company that trades at much lower multiples.
"We have significant investments in Africa. We're optimistic. But we don't just buy 'Africa.' You can't. You have to be discerning," he said.
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Harting manages the AllianceBernstein Emerging Markets Multi-Asset Portfolio, a mutual fund that invests in stocks and bonds. It's up 1.44 percent in 2014 through Dec. 9, according to marketing materials.
One major risk to investing on the continent is the likely end of cheap cash to finance projects, according to Harting. "In this era of QE and easy money in the developed world, the capital return requirements that investors have assigned to many African investment opportunities have been incredibly low," Harting said. "Countries that are coming out of civil war and default accessing money at 6 or 7 percent; that's never happened before and it's not going to last."
The new reality, Harting said, was an increased reliance on international development financing as private lenders pull back. That government-linked money comes with reform requirements, which complicates the flow of money.
"Global markets will become more discerning about investments in Africa," he said.
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Another risk is a drop in commodity prices.
Harting said much of the recent infrastructure investment recently has been in attractive industries like mining and oil production. But those sectors can be hit by commodity price swings; Harting cited a major off-shore drilling project near Angola that was recently canceled because the price of oil dropped below the required threshold.
"Just as you see shale projects canceled here in the United States, that's the way the market works," Harting said.
In order for Africa to grow successfully, Harting said two critical things are needed. One is higher productivity resulting from good governance and spurring higher rates of employment. The other is infrastructure, which is lacking in many of the continent's countries.
"We do see important signs of dramatic improvements in growth prospects," Harting said.
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