Ideas & Debate

Resurgent African equities beckon

oundo

Nairobi Securities Exchange CEO Geoffrey Odundo. FILE PHOTO | NMG

African equity markets had a banner year in 2017. Buoyed mostly by recovering global commodity prices — crude oil, metals and energy gained 15.7, 13.5 and 11.5 per cent respectively, according to World Bank Commodity Prices Index—most African markets recorded respectable gains compared to a few years ago.

The MSCI Frontier Markets Africa Index showed a positive return of 26.8 per cent last year compared to 6.37 per cent in 2016, 17.95 per cent in 2015 and 12.88 per cent in 2014.

Last year also witnessed a relatively better performance compared to rest of the world. S&P 500, FTSE100, Eurostoxx and MSCI World Index returned 19.4, 17.9, 22.7 and 22.4 per cent respectively.

Only MSCI Emerging Indices topped its performance with a 34.3 per cent return in the same period. No doubt, African equities are back, and to help turbocharge your African Portfolio 2018, here are my thoughts on the big three markets; Kenya, South Africa and Nigeria.

South Africa: All eyes are on Cyril Ramaphosa, the new leader of the ruling African National Congress.

Investors seem to take a liking to him — South African Rand rallied 10.3 per cent against the US dollar as soon as he clinched the party leader position— as he is seen as being pro-business.

He is likely to become president in the 2019 elections. It remains to be seen whether his election would reverse or avoid further credit-rating downgrades.

Overall Price to Earnings (P/E) ratio at the JSE stands at 20.3 times which is quite pricey. Nevertheless, being Africa’s biggest and most liquid market — market capitalisation sits slightly above Sh100 trillion and accounts for about 70 per cent of the total African market capitalisation —it presents an interesting opportunity for diversification.

Kenya: Nairobi Securities Exchange (NSE) did well in tuning-out all political noise to return 27 per cent last year.

The shilling remained stable as foreign inflows and the Central Bank’s activity supported the currency.

Yields for its 10 year Eurobond dropped from 7.7 per cent at the beginning of 2017 to close at 5.6 per cent at the end of the year.
That said, in 2018, investors would be hoping to see an end to the prolonged political crisis.

READ: How you should plan for 2018

Share prices may find support as the economy gets “back into business” after the election year.

Further support should also come from expected growth in East Africa which is expected to be the fastest in the region. Prices are still cheap— P/E ratio stands at 13.5 times, a position slightly above its historical average of 13.4.

Nigeria: Although Nigeria had the worst performing currency in the region after the Naira shed 14.2 per cent, its share market returned 20 per cent.

Rising oil prices portend well for the West African economy. Further, yield-starved investors are already piling into the country attracted by the Naira’s devaluation.

One-year Treasury bills stand above 18 per cent while its share market P/E ratio shows an inexpensive market at 12.8 times.

For now, improving investor sentiment owing to improving macroeconomic conditions, recovering commodity markets and a rampant demand for frontier assets should keep the momentum going for these countries in 2018.

But risks abound, among them policy tightening in advanced economies, local and global politics, credit risk and another fall in oil prices.