EVEN in the light of a poor environment for emerging and frontier markets, stocks in the rest of Africa have suffered over the past 18 months.
While emerging market shares in general are still about 40 percent ahead of their low point of March 2009, shares in African countries fell below their 2009 low point this month, giving every indication that the markets will repeat their dismal 22 percent decline of 2015.
Zambian shares were down a modest 7 percent in the local currency, but the kwacha’s sharp decline caused it to lose 46 percent in US dollars, making it the worst performer on the continent.
Even a safe haven such as Mauritius had a 23 percent decline, and Egypt, the most liquid market, slid 28 percent.
So far in 2016, Egypt is down a further 16 percent and Nigeria 15 percent.
Ashburton Africa Equity fund portfolio manager Paul Clark says some shares in Africa, such as Egypt’s Orascom Construction, now trade at half his estimate of fair value.
They could double and would still be worth buying.
A blue chip such as Commercial International Bank of Egypt is 70 percent below fair value, Clark says.
“But I can’t see what the catalyst will be in the short term that can change sentiment. There has been lazy thinking by many international investors to sell emerging and frontier market shares altogether.”
Clark argues that African markets look promising on “a three-to five-year view”.
Private equity, with a longer time horizon than traditional fund managers, is snapping up companies.
Most recently HTN Towers (formerly Helios Towers Nigeria) aborted its initial public offering as the indicative price was too low, and opted for private equity investment instead.
Direct investment also continues.
The Kellogg cereal company recently paid US$450 million to enhance its distribution in Nigeria.
And John Legat, manager of the Imara African Opportunities fund, says both Unilever and Diageo have applied to take the interest in their Nigerian subsidiaries up from 50 percent to 75 percent.
Legat says a benefit for African markets will be the introduction of compulsory pensions, which in the case of Nigeria was introduced 10 years ago and has added $25 billion to the savings pool.
There is widespread expectation that the two largest currencies in the region, the Nigerian naira and the Egyptian pound (neither of which floats freely) are being kept artificially high.
The black market rates for the naira, for example, indicate that it is at least 20 percent overvalued.
Many potential investors in these markets are holding off until after the expected devaluation.
Yet growth in Africa, even if it is slowing, is still expected to be at least 5 percent — though oil importers such as Kenya will outperform oil exporters Nigeria and Angola.
Cavan Osborne, manager of the Old Mutual Africa fund, argues that African oil shares look more promising than some other resource shares.
Osborne owns Seplat, a Nigerian oil producer which has bought some onshore assets cheaply from Shell.
Nick Ndiritu, portfolio manager of the Allan Gray Africa ex-SA fund, did not have a good 2015, as the fund was down 33 percent.
But he has not changed the portfolio much.
He holds 21 percent of the fund in Zimbabwe, which makes up less than 1 percent of the benchmark.
His main Zimbabwe holdings are cellphone operator Econet (which lost two-thirds of its value last year) and brewer Delta.
Ndiritu says these companies have been superbly managed in difficult circumstances and are set to benefit from any up tick in household consumption.
“We like staple businesses around the continent such as Eastern Tobacco in Egypt (a monopoly producer).
‘‘It may operate in a politically volatile country but … there is no evidence that the Egyptians have stopped smoking.”
Peter Townsend, manager of the Sanlam Africa Equity fund, says his fund aims to move away from the benchmark shares and has invested substantially in markets such as Zimbabwe, Uganda and Namibia.
He says one of the attractions of African corporates is that they usually have low debt and are cash generators.
And they have been de-rated to a level at which most economic factors have been priced in, on a p:e of 7.5 and a dividend yield of 4 percent.
But don’t expect a recovery soon. — Financial Mail SA
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