David Aserkoff
Sub-Saharan markets remain in lower league
By David Aserkoff | Published: 28 July, 2010
Given South Africa’s showing in the recent World Cup it would appear that Africa in 2010 is a lot like the US in 1994 – better at hosting the tournament than playing. Similarly, sub-Saharan stock markets in 2010 are a lot like the S&P 500 in 1994: poised for five very strong years of appreciation.
Africa’s strong GDP growth projections are well known at this point, with the region set to grow at around 5 percent this year and 5.9 percent in 2011; faster than anywhere else bar emerging Asia over the next five years, according to the International Monetary Fund.
The best truism for sub-Saharan African markets is that the buyer should buy like a stock-picker and the seller should sell like a bond trader. Stock-pickers look to find growing, profitable companies, of which sub-Saharan Africa has a plentiful supply. East African Breweries in Kenya and Guinness Nigeria, to name but a few, have impressive long-term growth rates, while the high EBITDA margins of Sonantel or Celtel/Zain-Bharti Zambia are two of the highest in the global emerging markets telecom universe.
Additionally, earnings growth in local terms is much more resilient to local economic shocks than most investors expect.
For investors to really make money in sub-Saharan Africa, selling discipline is essential. The odds of losing more than 25 percent in US dollar terms in any single year of the past decade in an sub-Saharan Africa market is about one in eight, with sub-Saharan Africa markets suffering whenever their currencies devalue. In light of this, keeping one eye on the macroeconomic backdrop is crucial when considering selling in African markets.
It is still true that much of Africa’s wealth is listed outside of the continent. Many small cap natural resource companies pop up on exchanges in London, Sydney and Toronto instead. These firms are generally formed by former influential oil executives or mining engineers, who typically hail from outside the continent and take a global approach to investing. This investor base is the same one that funds small natural resource companies around the world, seeing as the expertise to develop these resources is placed globally rather than in individual African countries.
Sub-Saharan African markets do have a few exceptional companies listed on them, but they still lack a large share of the continent’s best names. It is essential that more of these companies dual-list if domestic investors in Africa are to profit from the wealth being generated in their own countries.
For example, Nigerian capital markets would be much more developed if some of the oil E&P assets in the Delta were listed in Lagos. When Canadian business Heritage Oil made Uganda’s biggest oil discovery, stocks in the company traded more on one day than all of the Ugandan stock market traded last year (more than $30m on 7 April 2010, whilst the Ugandan stock market overall only traded about US$10m in 2009).
African stock markets are dominated by local monopolies and high margin companies. Benue Cement’s operating margin was 16 percent last year, while Sonatel – which dominates Francophone West Africa’s telecom sector – had EBITDA margins of 57 percent, well above the 50 percent that is considered exemplary in the sector.
