On Their Own

Sub-Saharan African stock markets drew little investor interest but still managed to soar in 2002 and early 2003.
Institutional Investor, October 2003

Despite the occasional visit by a Western leader—President George W. Bush made his African journey in July —all too many Westerners know precious little about the beleaguered continent. For a small contingent of investors, however, the region has become known for its hot markets.

Equity markets in undercovered sub-Saharan Africa (excluding South Africa) rose between 15 and 65 percent in the first half of 2003, compared with a 10.8 percent rise in the Standard & Poor’s 500 index and a 14.9 percent gain in International Finance Corp.’s investable composite index, the benchmark for global emerging markets.

Can the rally continue? That’s the question on the minds of the region’s investors, and for the moment, at least, the optimists outnumber the pessimists. “Stocks have gotten more expensive, but prices certainly haven’t gotten out of hand,” says John Niepold, Africa portfolio manager for Arlington, Virginia-based Emerging Markets Management. “This is by no means a bubble.”

“Africa is not following the manufacturing export-driven model of a Taiwan or a Korea,” notes James Graham-Maw, a partner in London-based Blakeney Management, which invests in early stage emerging markets, including those in Africa. Although commodity exports will continue to fuel much of Africa’s GDP growth, most listed companies rise and fall on the moves of local investors. With modest inflation and reasonably solid currencies, their prospects look good.

Blakeney and Emerging Markets Management each manage several hundred million dollars in assets in Africa. Washington, D.C.-based private equity investor Modern Africa Fund Managers has $105 million in capital, including $70 million of debt guaranteed by the Overseas Private Investment Corp.

Although sub-Saharan African markets are relatively small—the largest, Zimbabwe, had a market capitalization of $11.7 billion at the end of 2002—returns can be outsize. From the beginning of 2001 to the end of 2002, the $1.7 billion Botswana stock market was up 96.1 percent in dollar terms, according to the United Nations Development Program, and only slipped some 3.5 percent in the first half of 2003. The country’s market was helped by annual GDP growth of more than 5 percent in recent years. Of course, most developed-country investors tend to shy away because markets other than South Africa are illiquid—stocks can go weeks without a trade on some exchanges.

Money managers have done well with bank stocks such as ABC Holdings in Botswana, Barclays Bank in Kenya and Standard Chartered Bank in Ghana (the last two are U.K. bank subsidiaries). They boast price-earnings ratios ranging from 4 to 7 and dividend yields above 14 percent—compared to the S&P 500 average P/E of 28 and dividend yield of 1.64 during the past 12 months.

Investors have also scored significant gains in consumer-goods stocks. “Nigerians and Ghanaians are major consumers of toothpaste,” says Niepold. “Just about everyone uses Close-Up.” That’s good news for Unilever’s locally listed subsidiaries, Unilever Nigeria and Unilever Ghana. From January 1, 2002, to early last month, Unilever Ghana’s share price rose more than 260 percent. Unilever Nigeria was up 50 percent in the same period.

The recent focus on corporate governance has forced multinationals to treat their subsidiaries’ earnings in a more transparent fashion, observers say. Local companies no longer swallow losses or provide a write-off for a parent company.

Still, African political risk remains among the highest anywhere, and as Graham-Maw says, “In much of Africa, politics is the driver of economics.”