Sub-Saharan Africa: A Long Term Contrarian Investment Opportunity

I am increasingly intrigued by the idea of investing in Sub-Saharan Africa for the long term after a recent interview I conducted with Tim Staermose of the African Lions Fund. However, it’s definitely not a simple thesis, and it might take a long time to develop.

There are legitimate and visible risks to investing in Sub-Saharan Africa, but I believe the typical risks that everyone is aware of are not the only reason most investors are avoiding the region. It's the combination of those risks with the fact that the market hasn't performed well for a long time and that there are no easily identifiable catalysts on the horizon, except perhaps a commodities bull market.

In the short-term-oriented world we live in, where investors expect stock prices to rise immediately, these considerations make investing in Sub-Saharan Africa not an option for most. I have now listened to the interview with Tim a couple of times, and it’s shocking to hear how completely absent investors are from these markets.

This allows Tim to do what should be an anomaly in the markets and not possible under normal circumstances, which is to buy the bluest of blue-chip companies—market leaders that are profitable, resilient, and growing—at prices typically only seen for cigar butts in other markets. That’s only possible because he has practically no competition.

I am optimistic about Sub-Saharan Africa and hope that, over the long term, many countries in the region will follow a development path similar to that of other nations that have transitioned from frontier to emerging markets status. Investing in the economic growth associated with that transition can be a great way to compound wealth over time.

But as I mentioned earlier, there are real challenges that need to be overcome.

Some of the challenges Tim mentioned include exchange rate fluctuations, currency controls, high transaction costs, illiquidity, and potential political instability. These are all serious issues and not to be taken lightly. However, as with all investment risks, you can mitigate them to some extent by diversifying, offsetting individual equity risks at the portfolio level, and buying robust companies that are undervalued.

I was impressed by Tim’s thoughts on these challenges, as he has clearly considered almost every possible scenario and how to manage the associated risks. I think this contrasts sharply with many investment strategies in developed markets, which, in my opinion, are vulnerable to “black swan” events.

For example, what would happen to the typical investment portfolio in the West if we experienced surprise, very high levels of inflation for a few years? I don’t believe that most people who are invested in a typical 60/40 portfolio with a substantial allocation to low-yielding bonds or high-flying tech stocks are prepared for that.

On the other hand, for someone like Tim and many of the companies he invests in, that’s a scenario they have likely planned for and know how to manage.

The combination of quality companies at a cheap price, resiliency, and low levels of correlation with developed markets, which have been in a long, extended bull market, creates a very interesting risk-reward opportunity today—one that, in my opinion, makes a lot of sense to have exposure to in a portfolio.

However, you can’t simply buy an ETF and leave it at that. It’s actually quite challenging to gain exposure to this region due to illiquidity, peculiar risks and other factors. Additionally, the highest market cap companies typically have their primary businesses elsewhere, making traditional indexing tricky.

To gain exposure to Sub-Saharan Africa, I think Tim’s fund sounds solid and is managed by a thoughtful allocator of capital. I highly recommend listening to the interview with him if you haven’t already.

Another option I’m looking into is a company called Helios Fairfax Investment Partners, which trades in Canada (TSX: HFPC-U) and has substantial backing from Fairfax Financial. It is a private equity company that focuses on Africa and was formed from a merger between Fairfax Africa Holdings and Helios Holdings Limited.

It’s been a while since I last looked into the company, and I haven’t delved deep enough to be confident in it yet. However, I just listened to their annual meeting presentation, and it might be an interesting time to investigate further. They have been liquidating their legacy portfolio, which they inherited from Fairfax Africa and which was not performing well, and reinvesting the proceeds into new ventures while building their private equity business.

I’m not a shareholder of the company, but I might initiate a very small “feeler position” if I like what I find upon further investigation. I may also write up the company here or try to get someone from the company on the podcast, so if you’re interested, stay tuned.

Also, if you know of another opportunity similar to this one, please reach out, as I’m always interested in learning about new investment opportunities.

Thanks for reading!

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Disclaimer: This article is for informational purposes only and does not constitute investing advice. Please consult with a qualified financial advisor before making any investment decisions.