Africa was infamously described by The Economist as “hopeless” in 2000. In the latest edition, the newspaper dedicates its lead story and cover to the “new scramble for Africa”, with foreign governments and businesses rushing into the continent.
For us, Africa is replete with value. We see opportunities, particularly in Egypt, Nigeria, Ghana and Mauritius. It is by far the cheapest region we cover.
Yet, for equity investors, Africa has largely been “forgotten”. Over 2018 alone, the average daily traded value in countries like Egypt, Kenya, Morocco and Nigeria is, in aggregate, merely US$77mn, 14%, 18% and 62% lower than the equivalent figure one, three and nine years ago.
Also, trailing PB for these markets is 12% below the last five-year median (weighted by the traded value of each equity market). MSCI EM and FM are within 5% of their respective five-year medians.
Moreover, liquidity (equity traded value) is very low and concentrated. This implies a high risk of portfolio contagion from setbacks to a single large country or stock. For instance, 70% of the total traded value in Africa ex-South Africa (cUS$80mn per day in 2018) is in Egypt and Morocco; and 90% of Sub-Saharan Africa (again, ex-South Africa) traded value is in Nigeria and Kenya. This creates vulnerability to contagion in those remaining pan-African portfolios in the event of a disappointment for one of these countries.
Other risks to the region for equity investors include Kenya’s FX rate vulnerability and Zimbabwe repatriation (a pain point for most pan-Africa and some Frontier funds).
Yet, in general, growth is accelerating and policy risk is falling: in 2019, the IMF forecasts GDP growth rates 1.2ppts higher and inflation rates, fiscal deficits and current account deficits, respectively, 2.6ppts, 2.1ppts and 0.9ppts lower versus the prior five-year annual averages across Egypt, Kenya, Morocco and Nigeria.
What’s more, fundamental risks on politics (elections in Nigeria and Senegal have taken place relatively smoothly), economic growth and FX rate have fallen.
Still, in 2018, Africa (ex-South Africa) performed merely in line with emerging and frontier peers, which is unfair for such cheap markets. While we see ample opportunities in 2019 (based on market valuation, FX rate risk, macroeconomic growth and political risk), we believe a healthier global backdrop and greater investor tolerance for low liquidity is needed for these markets to outperform.
Where do you see opportunities in Africa? Let us know below.
Insights from Exotix Research…