Don't Miss Out on Africa
04/22/2010 12:01 am EST
Robert Scharar, co-manager of Commonweath Australia/New Zealand (CNZLX) and Commonwealth Global (CNGLX), sees potential south of the Sahara, as well as Down Under.
MoneyShow.com: You invest all over the world. Where are you seeing the best opportunities right now?
Scharar: We see a lot of activity in Africa. We've been involved there for about 15 years, and in the last two to three years we've seen a tremendous increase in opportunities in most every sector, particularly in the sub-Saharan continent.
Asia gets a lot of play because of China and India and their growth rates, but Africa also has a huge population, and a lot of natural resources. The politics are becoming more stable; you're getting changes of government through a democratic process.
Africa will, I think, come more and more to the forefront as a place to invest for American businesses. It's an unrecognized economic opportunity for a lot of people.
Q: What's changed in Africa over the last few years?
A: Increasing political stability, better education. The middle class is expanding very rapidly, and as wealth is accumulated and the middle class begins to emerge, they're still trying to bring members of the extended family up with them. You can certainly point out countries where there's civil war and strife, but a lot of countries are fairly peaceful, and while there is official corruption, voters are insisting on more and more transparency. Investors really should become a little bit more aware of the opportunities in Africa, and clearly American businesses should.
Q: Should people be worried because frontier markets have done so well in the last year? Why isn't this the end of the run?
A: Because the growth rates are still increasing. And these companies are not priced at frothy levels. If you looked at these, you'd reach a conclusion that there's plenty of room to move forward—even in countries like South Africa, where you have very developed companies that you can buy into.
In our global fund we've bought into some African companies involved in the distribution of financial services, particularly to the middle class. We've also bought into one that's involved in supermarket chains. And that goes beyond South Africa now—these companies are [also] doing business in other parts of Africa, and bringing with them a pretty sophisticated work force and knowledge base.
Q: Are your Australia and New Zealand investments a play on rapid growth in emerging Asia?
A: Yes. The middle class in India and China is going to expand. The first thing people do as they get wealthier is improve how they eat every day. New Zealand is really a bread basket for those marketplaces, exporting everything from pork and beef to fish, wool, dairy products, and logs. New Zealand has a huge natural water supply, and you need water for agriculture. At a time of a growing global water shortage, New Zealand has the ability to export water in the form of food. But it's hard to buy agricultural companies; they tend to be more cyclical. That's why, if you look at our New Zealand portfolio, we own a lot of the ports and we own freight companies. We've also invested in companies that provide agricultural technical support and banking services.
The mining stocks may be a little bit overpriced now. But all of the things that support that, for example these huge liquefied natural gas (LNG) projects they're doing, all the infrastructure that they need to put in to do that is a huge amount of money, and that's going to happen independent of what happens to the stock price of the mining companies over the next 24 months.
Q: Why have the Australian and New Zealand markets lagged this year?
A: New Zealand has a heck of a problem: The weighted average price of dairy products has moved up 62% over the last year, a huge increase. Their dollar is so darn strong that profits in New Zealand dollars are nowhere near reflecting the [growth] that has taken place. So you could have a 5% or 10% correction in the currency, and short-term investors may be holding back.
Q: How do these countries balance needing to raise rates to control inflation against increasingly uncompetitive currencies that can hold down exports and profits?
A: They have an enviable position. Take Australia: I've seen statistics that general government debt in the US is approaching 100% of [gross domestic product]. Australia, with all their fiscal expansion—and they haven't spent it all yet—is only approaching 22%.
So, here you have a country that has a tremendously strong balance sheet; inflation is kicking up a little bit, but it's not totally out of control, and they have much more flexibility to deal with it. In the US, a lot of [stimulus] money was spent to shore up financial balance sheets, which might have saved us from a financial calamity, but if you talk to small businesses, I don't think many people feel the money really got out into the system.
Australia is a high-investment, low-consumption country already, but they [spent their stimulus] on replacing schools, libraries and social housing, things they were going to need to do anyway in the next five, ten years, so that they have something to show for it.
Q: Thank you.