LONDON Jan 24 More than one in two institutional investors see Africa as the most attractive region to invest in the next decade, with one in three expecting to put at least 5 percent of their portfolios into the continent by 2016, a survey showed on Tuesday.
Some 158 institutions including pension funds, hedge funds and private banks polled by the Economist Intelligence Unit (EIU) said Nigeria and Kenya are likely to bring the best investment returns within Africa over the next three years, followed by Zimbabwe, Egypt and Ghana.
Currently, almost half of respondents have either no exposure or less than a one percent allocation to Africa, where an emerging middle class and growing consumerism are seen offering the most attractive investment opportunities.
"Africa was exclusively seen as a commodity play but now there are real economic growth drivers," said Mohammed Al Hashemi, chief executive officer of Abu Dhabi government-owned Invest AD Asset Management, which commissioned the report.
"Africa was a destination for grants and aid but going forward it will be the destination for trade and investment."
Private equity and infrastructure are expected to outpace commodities as the best asset classes for investment in Africa in the next three years.
Forty-six percent of the investors said energy and natural resources offer the best investment return over the next three years, followed by agriculture and agribusiness, construction and real estate and financial services.
The most favoured investment vehicle is multi-asset class funds, but respondents thought equity funds will give the most opportunity in the next three years.
Investors consider bribery and corruption as the main challenges of investing in Africa, as well as weak legal and governmental institutions. A third of respondents also cited political risk.
Al Hashemi said while instability in countries such as Nigeria, where the Islamist sect Boko Haram has killed hundreds of people in the past year, was an important factor in making investment decisions, he also looked at the fundamentals.
"We will keep an eye on politics and the changes there because they will have implications for economic policy," he said. "(But) the foundations that make us put our money there are still consistent."
Invest AD, which targets Middle East and Africa investment, already has funds focusing on Iraq and Libya.
Its Iraq Opportunity Fund returned around 20 percent in 2011, before the withdrawal of U.S. troops in December raised fears of renewed sectarian violence and weighed on local stocks.
"For much of 2011, Iraq was one of the best performing stock markets in the world. We've seen the market take a breather. We think there will be a resumption of the good performance in the Iraqi market. It was inevitable when U.S. troops left that people would sit on the sidelines," Al Hashemi said.
"Iraq has been put on a very firm path of progression and development...When we talk to our contacts and investors they're keen to add to their exposure to Iraq."
Invest AD also hopes to reinitiate its Libya Opportunity Fund, which was suspended in February after a launch in December 2010 due to the stock market closure.
"Libya is in dire need of upgrading infrastructure. The country is wealthy and has potential to be very wealthy. They are self-sufficient in funding a great deal of projects and we have now a great political will to implement these projects," Al Hashemi said. (editing by Ron Askew)