Eric Kibe, chief investment officer of the Sanlam African Frontier Markets fund, explains the growth drivers supporting the investment case for the continent.
With the global equity markets in turmoil and investors grappling to price in the new political risk dynamic into developed market equity valuation models, the African continent presents an apparent and compelling alternative investment destination.
Although African equities have recently also been pummelled by the uncertainty and fear pervasive across global equities, the African financial and capital markets are still less integrated with the global markets than the emerging market favourites – BRICS et al.
From the global investor’s perspective, Africa therefore offers a low correlation investment alternative, as well as one that has its inherent growth drivers supporting positive corporate fundamentals that underpin investment return.
What is the case for African investment?
The arguments for Africa include:
- Political, institutional, and economic reform
- Relatively robust and healthy fiscal positions
- Infrastructure expansion
- Favourable demography and urbanisation
- Expanding intra-regional trade
- Global (Asian) resource demand
It is these positives that became apparent when African economies managed to steer positive GDP growth through the global economic slowdown and now attract the interest of portfolio investors. These factors point to an outlook in which the African continent will sustain its GDP growth outperformance relative to developed economies.
The increased levels of portfolio flows into Africa have led to the African markets becoming more integrated into the global financial markets. Thus, despite stronger fundamentals, African equities have not escaped the recent turmoil in global markets, and have suffered from the flight to ‘safety’; the MSCI Africa ex South Africa Index has fallen to a two-and-a-half year low. Africa, nevertheless, holds considerable promise, and outside the South African market – a relatively mainstream emerging equity market – is literally the last investment frontier.
As is typical with frontiers though, the African markets are underdeveloped and have unique characteristics that may pose a challenge to newcomers and those without local footprint and knowledge.
The Africa ex South Africa equity markets in aggregate constitute less than 1% of global market capitalisation and are highly skewed, with the top 10 stocks across all markets making up between 58% and 100% of total market cap. As a consequence, retail investment is high, and motivated by the expectation that the small universe allows the individual investor to construct a simple ‘diversified’ equity portfolio.
These small stock markets, with retail participation rates of over 50% have high trading costs and price movements that are highly susceptible to ‘uninformed’ retail sentiment.
The continent is a major supplier of the resources that drive China and India’s economic expansion, and it is easily assumed African equity markets are dominated by commodity stocks, and that as an ‘asset class’, Africa is a commodity play. The reality is different.
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