Opportunity beckons as markets fail to track rising African economy
WAITING TO BE FOUND: A production line at the Renault factory in Melloussa, near Tangier. Cars made up 20 per cent of Morocco's exports in the first four months of 2015, a 12 per cent year-on-year increase. - AFP
With Africa's economic growth outperforming most of the world, investors would have expected better reward than the eight per cent decline delivered by the MSCI Emerging Frontier Africa Index excluding South Africa over the last six months.
Stock markets are usually an early indicator of economic performance, but this has not been the case for Africa this year. And this presents investors with opportunity.
With Africa's economic growth outperforming most of the world, investors would have expected better reward than the eight per cent decline delivered by the MSCI Emerging Frontier Africa Index excluding South Africa over the last six months. But political risk and currency uncertainty have dented sentiment, leaving stock market valuations on a 2015 price-earnings ratio basis at a 10 per cent discount to emerging markets and a 34 per cent discount to developed markets.
The economic picture, especially in North Africa, has improved dramatically.
For example, Morocco's economic growth is expected to rise to five per cent from 2.4 per cent in 2014. Growth has been led mainly by an expansion in the key agricultural and phosphate sectors, but the country is also becoming a hub for car manufacturers such as Renault that are exporting to Europe. In fact, cars made up 20 per cent of Morocco's exports in the first four months of 2015, a 12 per cent year-on-year increase.
Yet the market has been weighed down by a slowdown in the country's real estate sector and loan growth, as well as challenging domestic competition for its incumbent mobile operator, Maroc Telecom. Morocco's local share index declined by 3.4 per cent in US dollar terms in the first half of the year.
A similar story has played out in Egypt and Kenya - major African economies with Egypt having one of the largest and most liquid stock markets on the continent. Kenyan GDP is forecast by the World Bank to grow six per cent this year, one of the highest rates in the world, and the Egyptian economy is expected to pick up to 4.7 per cent growth in fiscal 2015-16, from 2.2 per cent the previous year, led by strong performance in the manufacturing, tourism and construction sectors.
However, the Egyptian market has declined by five per cent with investors still wary about the country's current account position and the direction of the Egyptian pound.
The Kenyan market has achieved over a 90 per cent total return in US dollar terms over the past three years, although we continue to favour the Kenyan mobile network operator Safaricom.
The Nigerian case is a little different. Heavily reliant on oil revenues, the country's economy has struggled to grow in light of falling global crude oil prices, with GDP growth expected to fall to four per cent from seven per cent last year. The stock market has consequently suffered, and despite a very positive election - when power was handed over smoothly for the first time in the country's history - investors are still fretting about uncertainty over the new cabinet and currency policy. With African markets underperforming this year's 1.67 per cent rise in the MSCI Emerging Markets index and the 2.75 per cent rise in the MSCI World Index, valuations are starting to look attractive for investors who believe markets will catch up with economic developments. In fact, earnings growth on the MSCI Emerging Frontier Africa Index excluding South Africa this year is 13.2 per cent, significantly higher than the MSCI Emerging index at 4.1 per cent.
Most of this opportunity can be found in Egypt, where a large investment conference held in March attracted more than $36 billion in international investment deals, creating opportunity for local
infrastructure, cement and electricity companies. The country's largest publicly-traded lender, Commercial International Bank, has overcome macro-economic challenges over the years to recently buy Citigroup's Egyptian retail business in a move to expand its local presence. Investors can also find value in consumer-related companies across the North Africa region, except for in Nigeria, where they should wait for a better entry point.
Many countries in Africa are growth stories waiting to take off, but face a number of barriers to growth due to political and economic instability. But with favourable demographics, ample resources, and economic reform, investors can expect to find value in the region once market overhangs are removed.
The writer is the portfolio manager for Invest AD's Sicav Emerging Africa fund and Iraq Opportunity Fund. Views expressed are his own and do not reflect the newspaper's policy.