Reeling international investors who appear to have nowhere to go to avoid plunging global share prices are being pointed in a new, hopeful direction by STANLIB’s London-based marketers – Africa.
Equity markets in Africa seem to be softening in line with other regions, but analysts at South Africa’s largest unit trust company have identified a quirk that suggests opportunity amid the misery.
Dylan Evans, STANLIB’s UK-domiciled director of global investment marketing, notes: “Key Africa markets have been falling, but not entirely in sympathy with international developments. African weakness is often market-specific.
“Corporate earnings and GDP growth projections in the 6% range remain in place – unlike North America, the UK and Euro-land which have a problem achieving much growth at all.
“Africa is different. Falls in equity prices don’t represent a fundamental downward shift in expectations. In contrast, African falls could represent significant value opportunity.”
By early September, the MSCI World Index of mostly developed markets was down 25% from its high. At the same stage, the MSCI Emerging Markets Index was down 35% from its peak, with many markets impacted by falling resource shares. On the face of it, Africa seems to be suffering a simple case of emerging market contagion, with some markets down more than 20%.
Look closer, says STANLIB, and Africa’s record for low international correlation is not coming unstuck in the way some might think.
“Now mightbe the time to again address the fundamentals in Africa,” says Evans. “On a three to five-year view, it could be appropriate to begin building a holding.”
Some equity losses are steep, but declines in many cases were triggered by individual circumstances – margin calls in Nigeria (down 10.83% in USD on the year to early September), retail selling in Mauritius (down 14.66%) and constitutional problems in Kenya (off 26.95%).
Evans comments: “Africa has fallen in common with othermarkets as the world worries about a global slowdown. However, thereis an important difference. African markets have suffered from multiple contraction; not falling growth and declining corporate profits.
“African economies continue to perform strongly and barring a disastrous collapse in commodity prices, African GDP growth should come in at 6%+ this year and next.Corporate earnings remain strong.”
Profits at many African companies are driven by domestic dynamics.
“It is difficult to see why structural growth in Nigerian banking should be derailed by a mildUS recession,” says Evans. “Why consumer stocks should not continue to benefit from the emergence ofa fledgling middle classor why North African markets should not continue to benefit from capital from the Gulf.”
To demonstrate the opportunity, STANLIB analysts examined the Standard Africa Equity Fund portfolio.
Excluding the 8% invested in mining exploration companies, the portfolio’s weighted 2009 p/e multiple is 11.9x, falling to 9.2x earningsin 2010.
The average 2009 p/e multiple for South Africa is down to 9x; for Ghana it’s 9.2x, for Mauritius 10.6x and for Nigeria 11.6x.
Evans concludes: “We don’t believe11.9x earnings is too high a price for earnings growthabove 20%, especially in a part of the world where foreign direct investment could lead to upsidegrowth surprises.
“Wherever market sentimentultimately drives multiples, we would argue that fundamental valuations areattractive at these levels.”
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