2009 performance masks 2010 potential
By Nicolas Clavel | Published: 31 March, 2010
To the casual observer, one glance at the performance of African stocks in 2009 may be enough to convince them that they don’t need to take a second look. The continent’s stock exchanges severely underperformed last year. Nigeria, for example, normally one of the continent’s most reliable performers, lost 34 percent.
It was the same story across the region, and the widespread underperformance was thrown into particularly sharp relief by the Bric indices, which overshadowed Africa with gains of over 70 percent in 2009. But that was last year. The combination of hot money swilling around from gains in India and China and the flat yields expected in mainstream US and European markets means that investors are looking for the real growth story of 2010. They would be well advised to take a closer look at Africa.
It is precisely because of last year’s performance that African stocks are a good bet for 2010. The reasons for its underperformance are largely cyclical, and by analysing its performance in 2009 we can accurately signpost where Africa is in its current economic cycle. Moreover, we can predict significant growth in the coming year.
As context, any economic cycle has four stages – early growth, late growth, early recession and late recession. Investor behaviour, particularly towards an asset class like frontier markets, is fairly easy to predict across the board in each cycle. In a late growth period, global asset investors tend to make defensive investments in developed markets, while reducing their frontier market exposure. By the time we enter an early recession stage, many of these investors will have exited their frontier markets positions entirely. The exodus from frontier markets during the early recession stage of last year accounted to a large degree for the underperformance of stocks across Africa. So far in the cycle, investor behaviour patterns have followed a predicted course.
We are currently in a late recession stage, going towards early growth. If we use emerging markets as a pathfinder for frontier markets (since EM tends to operate a stage ahead of its frontier cousins) we can see the potential African exchanges hold this year. Last year, investors moved money into mainstream EM (such as Bric) as returning confidence kicked in. Since many investors who invest in EM also invest in frontier markets, we expect to see money filtering towards frontier markets this year.
This is partly through a process of taking profits from mainstream EM and reallocating to frontier markets, but also through increased investments in equity markets, as investors rediscover their appetite for more “risky” investments as the early growth stage draws in.
However, the potential of African stocks this year is not just based on economic cycles and investor behaviour. Far from it. Africa boasts solid economic fundamentals, is cheap at a P/E ratio of roughly 12 and has a dividend yield of some 5 percent. Because of last year’s performance, the market is also awash with cheap valuations that are sure to be exploited. Moreover, because of the symbiotic nature of stock exchanges across Africa, much of the damage done last year were one-off events in one country that had a knock-on effect on markets across the region. As the wounds from these events heal, we can see markets recovering across the continent.
