Out of Africa with high hopes

Booming stock markets, bustling city centres, huge reserves of natural resources and soaring economic growth. Welcome to the new Africa. This week, one of Britain's leading asset managers, New Star, became the first to launch a fund which will invest solely in the countries of sub-Saharan Africa outside South Africa.

A continent often known for poverty, famine and dictators is now being sought out by City experts who think it could just be the next great investment opportunity. Poverty and malnutrition are still rampant across the continent, but the signs of improvement are encouraging.

In 2003, there were 17 African countries in which the economy was shrinking, but today that number has fallen to just six. Meanwhile the number where growth per head is higher than 3% has jumped from 18 to 25.

According to the Organisation for Economic Co-operation and Development (OECD), Africa's annual GDP growth has averaged about 5% annually over the past six years and is forecast to hit 6.7% in 2007.

So what's behind the growth? Two factors stand out: oil and China. Oil reserves in Africa make up 7% of the global total, and production is expected to double from 6m barrels a day over the next two decades. Oil imports from Africa (principally from Nigeria and Angola) now account for a greater share of US oil imports than the Middle East.

However, China is becoming more important than the US. Its voracious demand for resources has pushed up commodity prices and seen it turn to Africa as a source for raw materials.

China's president Hu Jintao has promised to double aid to Africa by 2009. He wants China's $40bn annual trade with Africa to grow to $100bn by 2020. Critics accuse China of treating Africa like a colonial territory and backing regimes with poor human rights records.

Jamie Allsop, the manager of New Star's Heart of Africa fund, says there are signs of "trickle-down," though he acknowledges that progress is slow. "When I first went to the Congo, virtually everyone was on foot; now there are a lot of bicycles and scooters. The big mining companies that have built schools and hospitals and asphalted the roads are the ones that have tended to retain their licences."

The countries that impress him most are Nigeria, Kenya, Botswana and Mauritius. They have the most developed and liquid stock markets, with around 50 companies that already have a market capitalisation of more than $250m.

Most of the investment opportunities, he says, are in telecoms, consumer staples and infrastructure companies. Some of the best value companies are in Kenya, where Nairobi is a fast-growing business hub for East Africa.

Mr Allsop likes MTN, a mobile phone provider that originated in South Africa but is now expanding fast in Nigeria, where already 20% of the population, Africa's largest, have a mobile. He has also invested in Sonatel, which operates in former French colonies such as Senegal and Mali. "It's on a yield of 5.6%, sells on 12 times earnings and has a 50% operating margin," he says.

A lot of the consumer staple names will be familiar to British investors; he likes Guinness Nigeria and Unilever Ghana. These stocks tend to have a local listing, with the parent group having a controlling shareholding.

New Star is not the first to set up an Africa fund, but the first to offer one that is denominated in sterling and open to smaller investors. Minimum investment is £12,500. Investec and Standard Bank of South Africa also offer Africa-based funds, but these tend to have a high minimum investment.

Critics say the fund is too risky for anybody who is not wealthy. Andrew Gadd of IFA group Lighthouse says: "I wouldn't touch it with a bargepole, unless you have an appetite for high risk." He adds that he is concerned about the accuracy of company accounts and reporting standards.

New Star says: "We believe this fund is high risk and therefore only suitable for investors who are able to bear the loss of all or part of their capital."