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Africa Opening the last frontier market

September 2008

Africa Opening the last frontier market

Presentation to the Securities & Investment Institute CPD Seminar 23 September 2008 Dr Ayo Salami

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Moving from promises to results
Africa is indeed on the move. In contrast with the 1990s, conflicts in Africa have declined, economic performance has improved and some clear high performers are beginning to emerge. World Bank 2006

Africa has learnt to trade more effectively with the rest of the world, to rely more on the private sector, and to avoid the very serious collapses in economic growth that characterized the 1970s, 1980s and even the early 1990s. World Bank 2007

Since 1995 there has been at least one African equity market among the top 10 best performing markets in the world. Last year (2007), it was Zambia, posting gains of 127% in US dollar terms. Joining Zambia among the best performing markets was Malawi (up 114%), Cote DIvoire (up 105%) and Nigeria (up 90%). In 2006, Malawi was the best performing stock market in the world posting gains of 129% in US dollar terms. African Business Research Limited

Why invest in Africa?

Africa A Lie by Omission

Misconceptions about Africa

The view from abroad :

Investing in Africa is risky The region is a basket case that is politically unstable Regulations are insurmountable There are no investment opportunities

Africa in Perspective
Global Land Mass and Proportion of Worlds Resources

Square Miles: China 3,705,390 Proportion of global resources in Africa: Land Mass Diamonds Gold Phosphate Platinum Petroleum Total Africa 11,664,680 11,707,000
Source: Academic Centre for Education Development Source: Ayittey, George B.N. Africa Betrayed, 1993, Palgrave Macmillan , ISBN: 0312104006

United States 3,618,770 India Europe Argentina 1,266,595 1,905,000 1,065,189

20% 90% 50% 90% 40% 8% 12%

New Zealand 103,736

Natural Gas

Political Overview
Wind of change blowing across Africa declining political risk
Circa.1980 Current

Source: Duet, African Business Research

Macro Overview
12 consecutive years of growth in real per capita CDP Population and GDP Growth (Sub-Saharan Africa ex South Africa)
Since 1995, Real GDP grow th has exceeded population grow th

6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0%



Population (grow th)

Source: World Bank Data

Grow th in real GDP

Grow th in real per capita GDP




















Macro Overview
African growth is now among the highest in the world GDP Growth across the world
12 10 % Change Real GDP 8 6 4 2 0 2000 World Developing Asia
Source: World Bank Data









G7 Countries Middle East

Sub-Saharan Africa Newly Industrialised Asia

Macro Overview
Some out-performing economies 2008 Forecast growth in Real GDP
Angola Sudan Equatorial Guinea Nigeria Uganda Mozambique Rwanda Botswana
Source: World Bank Data

15.9 % 12.6% 10.0% 9.0% 7.1% 7.0% 6.0% 4.9%

Macro Overview
Sound monetary policies .

8.5% Deficit as % of GDP 6.5% 4.5% 2.5% 0.5% -1.5% -3.5% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

12.0 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 Budget deficit (US$bn) 10.0

Budget Deficit (US$ billions) Deficit Excluding Grants as % of GDP

Deficit Including Grants as % of GDP

Source: World Bank data


Macro Overview
have controlled money supply and reduced inflation
25.0% 30.0% 25.0% 20.0% 20.0% 15.0% Inflation (%) 15.0% 10.0% 5.0% 0.0% 5.0% -5.0% -10.0% 0.0% 1988
Source: World Bank data


-15.0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006E 2007E 2008E 2009E

Year-On-Year % in price index

Growth in money supply

Ratio of money supply to GDP

Money supply (%)


Macro Overview
External debt is becoming sustainable
Debt Service to Exports Ratio (%)

30.0% 25.0% 20.0%

External Debt as % of GDP

120.0% 100.0% 80.0%

15.0% 60.0% 10.0% 40.0% 20.0% 0.0%

2006E 2007E 2008E 2009E 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

5.0% 0.0%

Debt service to exports ratio

Source: World Bank data

External debt as % of GDP


Macro Overview
With a little help from our friends in China
16000 14000 12000 10000 8000 6000 4000 2000 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

US Dollar millions

As the Chinese economic resurgence has proceeded, Africa has become more important for China as a source of the raw materials needed by the Chinese manufacturing sector. African economies, in particular oil and commodity producers have benefited substantially from Chinas demand for raw materials The historical trade deficit with Chinas has now become a surplus

China Imports from Africa

Source: WTO Direction of trade statistics

China Exports to Africa


Correlation with other global markets

Low correlation with other global markets offers diversification opportunities

Correlation matrix between regional equity markets

Emerging markets Latin America South Africa World Index World Small Companies

Africa (ex South Africa) Asia Emerging markets Far East G7 Countries Latin America South Africa World Index World Small Companies

Africa Asia 100% -9% 100% -7% 88% -10% 99% 12% 18% -14% 6% 3% 42% 14% 21% 14% 22%

Far East

G7 Countries

100% 86% 43% 44% 58% 46% 46%

100% 17% 5% 40% 20% 21%

100% 57% 22% 99% 90%

100% 7% 57% 46%

100% 24% 28%

100% 90%


Correlation coefficients based on daily equity returns between 1/1/2000 and 29/09/2006 Source: MSCI, African Business Research


Correlation with other global markets

Anybody heard of Sub-Prime?

USD Returns to various equity markets over the period 19 July to 15 August 2007
10% 5% 0% -5% -10% -15% -20% -25% West Africa Sub-Saharan Africa Africa (ex-SAfrica) East Africa North Africa Southern Africa India Japan China Asia Far East Germany United States G7 Index World Index Europe Russia United Kingdom Eastern Europe Emerging Markets South Africa Latin America Brazil

The correction in global equity markets following the sub-prime crisis had minimal impact on Africa

Source: MSCI, African Business Research

On July 19, 2007, the Dow Jones Industrial Average hit a record high, closing above 14,000 for the first time. By August 15, the Dow had dropped below 13,000 and the S&P 500 had crossed into negative territory year-to-date.


Correlation with other global markets

Did you say something happened in China? Sorry we missed it!
USD Returns to various equity markets over the 2 week period 26 Feb to 9 March 2007
4% 2% 0% -2% -4% -6% -8% -10% North Africa West Africa Sub-Saharan Africa Southern Africa Japan USA G7 Countries World Index Europe East Africa United Kingdom Latin America Germany Brazil Far East Emerging Markets India Eastern Europe Russia South Africa China Africa ex-SAfrica Asia

The sell-off in global equity markets following the correction in China in February did not affect Africa

Source: MSCI, African Business Research

On February 27, 2007, the Shanghai index plunged 8.8%, its biggest one day drop in a decade following rumors of the introduction of capital gains tax on equity investments. Over the next two weeks, most global markets followed with sharp declines.


African Equity Markets From Cape to Cairo

There are 22 stock exchanges in Africa with a combined market value of US$670.8 billion and 2,090 listed equities
Number of Market Value listed companies Sub-Saharan Africa (ex SA) South Africa North Africa $129.2 bn $339.9 bn $201.7 bn 551 427 1,112

Data as at 31 August 2008


Trading and settlement

Love thy neighbour but dont take counterparty risk
Country Algeria Botswana BRVM Cameroon Cape Verde Egypt Trading system Electronic Call over Electronic Settlement cycle t+5 t+5 t+5 Central depository Yes yes Yes


t+2 for active shares t+3 for dematerialised shares t+4 for physical shares t+3 t+5 t+7 t+3 t+3 t+3 t+3 t+3 t+5 t+3 t+3 t+5 t+5 t+7


Ghana Kenya Malawi Mauritius Morocco Mozambique Namibia Nigeria South Africa Sudan Swaziland Tanzania Tunisia Uganda Zambia Zimbabwe

Call over Electronic Call over Electronic Electronic Electronic Electronic Electronic Call over Electronic Electronic Electronic Call over Call over

yes Yes yes Yes yes

12 countries (94% of the stock markets ex South Africa) have electronic and automated trading platforms. More countries are already planning a switch over.

Yes yes

Also more markets are moving towards the international standard of t+3 settlement cycle

yes yes yes


Natural Log of market size (US$ million) 10 12 14 0 South Africa Egypt Morocco Kenya Cote D'Ivoire Mauritius Tunisia Zimbabwe Botswana Zambia Ghana Malawi Uganda Tanzania Swaziland Mozambique Nigeria Namibia 2 4 6 8

$339.9 bn $120.1 $81.3 bn

Market values of stock exchanges in Africa

$76.4 bn $14.4 bn $7.3 bn $5.5 bn $5.3 bn $4.9 bn $4.5 bn $4.2 bn $2.8 bn $1.5 bn $1.1 bn $0.85 bn $0.57 bn $0.15 bn $0.1 bn

Size matters ?

Data as at 31 August 2008






There is a good distribution of economic sectors

Jointly, banks, construction and consumer goods companies represent 70% of the total capitalisation of sub-Saharan African equity markets ex South Africa.
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Banks Telecom Construction Food Conglomerates Real Estate Oil and Gas Entertainment Finance Chemicals Insurance Agriculture Health Transportation Manufacturing Utilities Consumer Goods Mining Retail Info Technology Services Autos Media

One of the least known open secrets of the investment world is that African banks are among the most profitable in the world with average ROE above 30%. The high proportion of telecom companies reflects Africas status as the fastest growing telecoms market in the world. The average mobile phone user in Nigeria spends US$22 per month nearly double that of a Chinese user.

Africa (ex South Africa)

Data as at 31 August 2008


African equity markets Great returns

Annual returns to Sub-Saharan Africa equity markets (ex South Africa) over 1995 2007
70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average

Average annual returns of 11.5% (in US$) over the last 12 years from Jan. 1995 to December 2007, relative to 8.8% for SA, 6.3% for G7 countries and 6.6% for the All Global equities markets.
Source: Local Stock Exchanges, African Business Research


Equity returns among the best in the world

Average annual returns to various regions (1995 to 2007)
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Emerging Markets G7 Countries SubSaharan Africa South Africa Far East Latin America Eastern Europe Asia

Source: MSCI, African Business Research


2007 Another Vintage year

US$ Returns to sub-Saharan African equity markets
125% 105% 85% 65% 45% 25% 5% -15% Mauritius Zambia Malawi Namibia Nigeria BRVM Botswana




Source: Local Stock Exchanges, African Business Research

Avg (ex S Africa)




Lose on the currency swing Gain on the growth roundabout

Sub-Saharan Africa equity returns in US$ since 1994 (excluding South Africa and Zimbabwe)
480% 430% 380% Cumulative $ returns (%) -5% 330% 280% 230% 180% 130% 80% 30% -20% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -55% -65% Despite currency depreciation, cumulative $returns are positive averaging 12% per annum -15% -25% -35% -45% 15% 5% Annual % loss on currency

Annual % loss on currency

Cumulative $ returns

Source: Local Stock Exchanges, African Business Research


What about volatility? Give a dog a bad name

Standard deviation of annual returns (1995 2007)
45% 40% 37% 35% 30% 25% 20% 15% 10% 5% 0% North Africa Eastern Europe Far East Latin America Emerging Markets South Africa Sub-Saharan Africa World Small Companies G7 Countries Asia 19% 18% 36% 35% 35% 31% 30% 23% 44%

The risk from investing in Africa is similar to that of other emerging markets. The perception that Africa is inherently riskier is not supported by data

Source: MSCI, African Business Research


Risk Return Ratio How Sharpe is that?

50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Far East World Small Companies North Africa Latin America Eastern Europe Sub-Saharan Africa G7 Countries South Africa Emerging Markets Asia 3% 50% 41% 39%

38% 35% 32% 25% 21%

Sharpe ratio for SubSaharan Africa is 1.5x better than for emerging markets generally

Source: MSCI, African Business Research


Risk of Loss
You think I am a loser, wait till you meet my siblings
Number of losing months (Jan 2000 to August2008, 104 Months )

60 50 Number of losing months 40 30 20 10 0



50% 47 346 44 40 45% 38 37 40% 35% 30% 25% 20% 15% 10% 5% 0% Risk of loss

G7 Countries

Far East

World Index

SSA (exSouth Africa)

Eastern Europe

Emerging Markets

Latin America

Source: MSCI, African Business Research


Number of losing months

Risk of loss

Risk of Loss for Africa is similar to other regions of the world


Historic Value At Risk Always look on the bright side of life

25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% World Index G7 Countries Far East Emerging Markets South Africa Latin America Eastern Europe Africa (ex South Africa) Asia

Low est Monthly Return

Highest Monthly Return

Outside the developed world, Africa has the lowest Historic VAR
Source: MSCI, African Business Research


Trading Liquidity
Spreading equity culture reflected in rising turnover
20.00 18.00 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 4.00 2.00 2000 2001 2002 2003 2004 2005 2006 2007 6.0% 4.0%

Annual Traded Volume (US$ billion)


12.00 10.00 8.00 6.00

Annual Traded Volume

Source: Local Stock Exchanges, African Business Research

Turnover ratio

Turnover Ratio (%)


Annual traded volume has increased by 25x since 2000


Investment strategies

Key sectors for equity investors Banks Telecoms Breweries Construction and cement Consumer goods Increasing number of investment vehicles are becoming available. In the last 3 years about 10 new Africa focused funds have been launched Research can be challenging but fun

Dynamics of economic reform

We believe Africa is positioned here on the growth curve

Total output Expected Output

Africa is just beginning to realise the benefits of the economic restructuring of the 1990s. Africa has had the pain, the gains are about to become evident 15 years ago, Africa would not have been able to cope with a doubling of energy prices. Despite recent doubling of oil prices few African countries have required balance of payments support from the IMF. The continent is less vulnerable to external shocks.

Private sector output

Public sector output

Cost of input
Source: Olivier Blanchard; The Economics of Post-Communist Transition


Would you invest in these countries?

A country recently endured a long and bloody civil war, the assassination of its president, a financial panic and an influx of poor immigrants United States of America

A country formed from the ruins of a vanquished army forced from its historic homeland to a small barren island


A country divided after a long and destructive civil war and still technically at a state of war A country that started a regional war, suffered a humiliating defeat, heavy bombing that destroyed its infrastructure and without a history of civil liberties or democratic government




Duet: Who are we?

We are farmers not hunters


Duet Group is a client-focused financial group specialising in Alternative Asset Management that is dedicated not only to generating superior investment returns, but also to delivering risk management, transparency and client service required by sophisticated investors. Duet Group was founded by Henry Gabay & Alain Schibl in June 2002 in London. Osman Semerci joined Duet Group in April 2008 as Chief Executive Officer and Managing Partner. As of 1st July 2008 Duet Group has USD 1.8 billion of equity under management.


Values and Principles

Duets primary focus is its clients needs. It strives to understand their individual investment objectives. Values such as integrity, fairness and transparency ensure its reputation. Through these qualities it looks to build solid, long-lasting relationships with its clients. Through commitment and respect to its people Duet aims to create a close, collegial working environment. This is essential to produce optimum results from its individual team members and thus determines its overall success. Duets commitment to excellence ensures that they approach each task in hand with professionalism and dedication.


Group Structure

Duet Asset Management Hedge Funds

Duet Multi Strategy Duet Global Opportunities Duet Convertibles Duet Special Situations Astor Duet Managed Futures Duet Global Macro

Duet Private Equity & Real Estate BR.I.T Platform

Duet Financial Products Structured Products


Brazil: ITACARE Real Estate Fund India: SARE South Asia Real Estate Fund India: Duet India Hotels Fund Turkey: Duet Golden Horn Real Estate Fund

Fund of Funds
GSAH Optimum

Duet Real Estate

Duet Luxury Hotel Fund I

Capital Markets
Placement Agent

Long Only Funds

Duet Victoire Africa Index Fund

Duet Private Equity


Corporate Finance


Operating Model

Founding Partner & Co-Chairman

Alain Schibl

Henry Gabay
Founding Partner & Co-Chairman

Managing Partner & CEO

Osman Semerci

Trading Hedge Funds

Private Equity Real Estate Investor Relations

Financial Products

New Business Development Marketing CFO Risk Management Compliance Operations Technology 39 39


Duet Asset Management is authorised and regulated by the FSA and is registered as an Investment Advisor with the SEC. Duets mission is to become the leading provider of absolute return investment strategies to sophisticated investors. Each strategy aims to deliver risk-adjusted absolute returns uncorrelated to broad market indices. Duet integrates its Investment Managers through a common infrastructure and economic alignment based on shared equity ownership. The alignment of incentives is critical to achieving sustainability, team collaboration, developing and retaining quality people and building a long-term franchise value. Duet Asset Management Ltd is the Investment Manager of: Hedge Funds
Duet Multi Strategy Duet Global Opportunities Duet Convertibles Duet Special Situations Astor Duet Managed Futures Duet Global Macro

Long Only Funds

Duet Victoire Africa Index Fund

Fund of Funds
GSAH Optimum


Duet Victoire Africa Index Fund

The fund seeks to replicate the performance of a proprietary benchmark index that measures the investment returns of large capitalisation stocks listed on stock exchanges in sub-Saharan Africa excluding the Johannesburg Stock Exchange. The benchmark index is the Sub-Saharan Africa Large Companies Index. This is a customised market-cap weighted index developed by Dr Ayo Salami and his research team.

Sub-Saharan Africa Large Companies Index US$ Returns


Investment Strategy

The Duet Victoire Africa Index is composed of all companies listed on stock exchanges in Sub-Saharan African countries (ex South Africa) with a market capitalisation above $250 million that meet minimum trading liquidity requirements. The index will replicate the benchmark index by investing all, or substantially all, of its assets in the stocks that make up the Sub-Saharan Africa Large Companies Index, holding each stock in approximately the same proportion as its weighting in the index. The index manager will ensure that the index rules are closely adhered to at all times, however, the investment guidelines allow the index manager to temporarily remove stock from the portfolio if he becomes aware of a company suffering from financial distress or illiquidity.


Africa The Indexing Approach

Significant challenges are faced for investors seeking alpha. Active managers in Africa are compelled to use a bottom-up approach to stock selection with liquidity and market size as two of the key screening criteria. By the time a stock will meet the minimum liquidity constraints that most active fund managers are using, the stock is not likely to be under-valued. Higher transaction costs in emerging markets combined with high turnover can represent a significant performance hurdle for active managers in emerging markets. Index funds deliver a highly transparent investment processes, that consistently comply with fund guidelines and regulations. Index funds provide investors with low cost access to the performance of different financial markets. For the large relatively liquid stocks in Africa, a passive investment strategy will prove to be effective. Even in Africa it is difficult to consistently beat the market. In the search for alpha, you are more likely to find beta and sigma.


Index Membership Rules

The primary factors that determine index membership are liquidity and market value. To be eligible for inclusion in the index, each individual security must achieve a traded turnover of at least 0.1% of its market capitalisation in the quarter preceding the index review date and in at least 2 of the 4 quarters prior to the quarterly index review date. At each quarterly review date all securities that satisfy the liquidity constraint and have a market value above $250 million are selected. Inclusion and deletion of index constituents is managed according to the following buffer rules:An index constituent is not deleted from the index until its market capitalisation has been below $250 million for at least 2 consecutive quarters. A non constituent is not added to the index until its market capitalisation has been above $250 million for at least two consecutive quarters. Constituent companies in the index are reviewed on the last day of March, June, September and December and the rules governing index membership is implemented by a computer algorithm. The index is capped and no single constituent has a weighting of more than 10%. The aggregate weighting for all securities from a single country is capped at 40%.


Historic Simulation
Benchmark Index Price Returns

The historic performance of the Index was simulated back to 31 March 1999 to create a time series of daily returns for the index, with quality revision of the securities in the index. The index has generated positive returns in 27 out of the last 35 quarters.


Historic Simulation
Summary Statistics Sub-Saharan Africa Large Companies Index

2007 Return


Annualised Standard Deviation (over last 5 years monthly returns)


2006 Return

38.4% Best Quarterly Return 23.3% -16.7%

2005 Return


Worst Quarterly Return

2004 Return


Best Monthly Return Worst Monthly Return

12.4% -10.2%

2003 Return

43.2% Percentage of positive months 73.3%

2002 Return Index since inception

21.5% 599.2%

In last 5 years

(31 March 1999 to 31 Jan 2008) 46

Lets start running

Every morning in Africa, a Gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a Lion wakes up. It knows it must outrun the slowest Gazelle or it will starve to death. It doesn't matter whether you are a Lion or a Gazelle... when the sun comes up, you'd better be running.


Sustaining growth in Africa

No magic bullet, however growth has to be private sector-led Improving property protection rights Enhancing the international networks of African companies Closing the infrastructure gap particularly transportation and housing Creating vibrant financial markets regional cooperation

Conclusion If you see a bandwagon, you have missed it

Contrary to perception Africa offers significant growth and profit opportunities Africa is still under the radar of most investors and hence offers great opportunities to the early adopters Future equity returns from developed markets are projected to be significantly lower than historic levels Spreading equity culture and rising trading volumes Returns outweigh currency depreciation A credible and peaceful future of the world in the 21st century must include a positive future for Africa Development of efficient financial markets is integral to the alleviation of poverty