Wise investors cherry pick the Africa Rising narrative

Is the Fat Lady finally singing the “Africa Rising” swan song? African equities are trading lower this year, joining a global equity selloff, with investors unable to shake off concerns about continents’ growth prospects as they also keep an eye on the brewing US-China trade war. NSE 20 Share index is down over 20 percent year to date. FTSE/JSE All Share (South Africa), EGX 30 (Egypt) and NSE (Nigeria), all major markets in the region, have climbed down more than 12 percent.

Rising Sovereign debt pile, subdued outlook on commodities and the weak economic growth are some of the reasons Africa Rising – a reference to the strong economic performance across the continent between 2000-2014 – sceptics are using to question the narrative. And more bad news keeps coming.

The October 2018 issue of Africa’s Pulse, the bi-annual analysis of the state of African economies by the World Bank, forecasts the regions’ 2018 growth to be slower than expected. Average growth rate is estimated at 2.7 percent which represents a slight increase from 2.3 percent in 2017. The slower pace of the recovery (0.4 percent lower than April forecast) is explained by the sluggish expansion in the region’s three largest economies: Nigeria, South Africa and Angola.

Feeding this gloomy expectation are a myriad of challenges. One being rising debt vulnerabilities. According to Oversees Development Institute (ODI), almost 40 percent of sub-Saharan African countries are in danger of slipping into a major debt crisis. Eight countries are already in debt distress, while a further 18 are at high risk of joining them – a number that has more than doubled since 2013. A stronger US dollar is also compounding concerns too; a stronger dollar makes dollar-denominated Eurobonds re-payments harder. It’s also making commodities expensive and frontier markets unattractive.

But is the Africa Rising story really dead? Folks at the Africa Growth Initiative (AGI) don’t seem to think so.

First, they posit that excluding the three large economies from the low aggregate growth, the figure will jump above four percent (above the 3.7 percent IMF 2018/19 global growth estimates). Furthermore, two-thirds of the regions’ economies are expanding faster than the global economy this year. One-third of them are expanding at a rate of five percent or higher. Hence, they surmise it us premature to call for an end of the rising narrative.

Second, they argue that the commodity prices were not the only factor behind the previous rise. Other factors – improvements in macroeconomic management, governance and business environments – also contributed immensely. These factors are still in force and should continue to support economic expansion.

My humble perspective is that Africa is not a hopeless continent. For now, “Africa Rising” need not mean “all” African countries rising. Increasingly, African economies are differentiating themselves, and we ought to evaluate them on country-specific fundamentals. From an investors’ point of view, this should thus be the key consideration; when fear exists, find “good returns” opportunities for buying. When others scuttle out of fear that Africa’s economic promise may have been overshadowed by risks, get busy snapping up valuation discounts like they were “Black Friday” deals.