Finding African investment opportunities in a low growth environment
As global markets grapple with lower economic growth, focus has shifted away from Africa as a growth engine of the future.
A slump in the oil price, coupled with falling demand for commodities has depressed many African economies. While the global economy shows little immediate signs of recovery, South Africans would do well to remember that the medium- to longer-term arguments for investing in other African countries still stand.
• Africa is coming off a low base, as are many other frontier markets.
• Africa has one of the youngest and the fastest growing population in the world. This means less elderly people to care for and more people coming of working age to contribute to economic growth.
• African markets, excluding South Africa, are less correlated to world markets and so offer diversification benefits.
• African currencies tend to be more stable than the rand, with Ghana being the exception.
• South African pension regulation has allowed a specific 5% allocation to invest in Africa.
A foot in the door and feet on the ground
Africa is not widely known for its freely available data and statistics; although there are some exceptions. This means that spending time in-country and speaking to people open up the opportunity to gain more timeous information and potentially gain better insights. This can ultimately lead to better investment decisions.
When is it time to invest in Africa?
Our approach, when deciding on the time to invest, relies on the following themes:
• Valuation: The MSCI Frontier Markets Africa Index (excluding South Africa) is normally a good benchmark. This Index peaked in September 2014, but by the end of March 2016 was down around 35% in US Dollar terms and nearly 20% in Rand terms from this high. At the same time, the dividend yield is sitting at 4.5%, compared with the MSCI South Africa Index’s 3.0%.
• Quality: While this does not have much to do with timing, it is worth a quick mention. While competition is increasing in some areas, many African companies actually enjoy monopoly status, which allows for attractive returns, with return of earnings higher than the South African market.
• Growth: This is probably the most important factor to consider. Share prices are ultimately driven by supply and demand. For the past few years, emerging markets have been unloved, so it is very important to think about when they will come back into favour.
• Sentiment: When looking at sentiment within Africa, one can easily define it as the currency outlook. While currency movements have historically accounted for around 25% of returns in emerging markets, over the past year this has accounted for closer to 90% of returns. Rand investors will know all about this. It is best to invest after currency devaluation.
Is the rest of Africa attractive?
The rest of Africa is fairly attractive, but before investing, a suggestion would be to wait for the Nigerian currency devaluation and possibly a further downward movement of the Egyptian pound.
However, the real positive returns will probably transpire once global economic growth accelerates and developed market investor’s start looking to take advantage of what Africa has to offer.
While overall growth on the continent is being restrained by the two largest economies, South Africa and Nigeria, there are still a good number of countries that are continuing to deliver economic growth in excess of 5%; particularly in East Africa.
The stirring signs of change
As global growth slows, Africa has become the forgotten continent. However, market sentiment turns quickly and Africa will undoubtedly regain favour with investors. Investing in Africa is not without challenges, but can a long-term investor risk not having exposure to one of the growth engines of the future?
