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Nigerian Equities Take Lead in New Scramble for Africa

11 Feb 2013

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WINDOW

By Goddy Egene with agency Reports

The Nigerian equities market is leading African markets posting a return of 63 per cent in United States dollar terms during the last 12 months as foreign investors scrambled to be part of the bumper harvest in frontiers markets.
Reports by Financial Times (FT) of London also indicated that money flowing into Africa-dedicated equity funds last December reached $878.4 million, the biggest monthly inflow in just over two years and four times the amount.


According to FT, hunters of investment exotica are heading to Africa, where some of the world’s riskiest markets are enjoying big gains.
After trailing behind more mainstream markets for the better part of a decade, so-called frontier markets as defined by index provider, MSCI, have climbed more than eight per cent already this year – outpacing both emerging and developed stock markets.


Vietnam, Dubai, Argentina and Kazakhstan have all enjoyed a robust start in the year, but fund managers argue that the real frontier market stars are Africa’s bourses.
However, Head of Bank of America Merrill Lynch's South African operations, Mr. Richad Gush, said there is a second scramble for Africa underway.


The larger sub-Saharan markets have been the primary beneficiaries. While some smaller markets, such as Namibia and Zambia, have languished, Nigerian stocks have returned almost 63 per cent in US dollar terms during the past 12 months; Kenya’s Nairobi All-Share index has returned 46 per cent and Ghana’s market has climbed more than 17 per cent.


Year-to-date alone, the Nigerian Stock Exchange (NSE) All-Share Index climbed 18.6 per cent to close at 33,313.48 last Friday.
That is quite a turnaround. Before the global financial crisis, many frontier market investors favoured countries such as Vietnam, and regions such as the oil-rich Gulf.


But the Chief Executive of Silk Invest, a boutique asset manager, Zick Bekkali, said nowadays, it is Africa that is the continent on investors’ lips.
“When the frontier markets story started before the crisis people actually tilted away from Africa, but these days that is where they want to go above all,” he said.


Investing in the continent’s stock markets can be a turbulent ride, because of the underlying shares and the choppiness of exchange rates. For example, Namibia’s market is up about 8 per cent during the past year, but down 10 per cent in US dollar terms.
The economic gains of many African countries are also linked to commodity export booms. Sceptics caution that if that unravels, growth – and investor prospects – will be dented.


The limited size and depth of the markets are also a challenge. Ashmore estimates that, excluding the South African market, there are about 250 investable companies across 17 exchanges worth roughly $250 billion. But this makes the overall market smaller than Denmark, and about the same size as the Philippines.


Trading volumes are woefully low by international standards. Even Nigeria’s stock exchange, the busiest in sub-Saharan Africa apart from South Africa, only sees $40 million of shares change hands a day on average. Investors therefore face difficulty exiting larger investments. Even access can be a technical challenge in some markets.


Yet some fund managers are still attracted to African equities. While the developed world faces years of economic torpor and painful deleveraging, and in some larger emerging markets growth is slowing, many African countries are enjoying an economic renaissance.
Asset managers say African shares are cheap. Even after the recent run, most exchanges are only now trading at roughly the same or slightly lower forward-looking price-to-earnings ratios as emerging markets.


Julie Dickson, a fund manager at Ashmore, argues that the rally should be sustained by still-compelling dividend payments. She estimates that the dividend yield is about 6 per cent on average in Africa, compared with about 3 per cent in emerging markets.
African markets also offer some diversification away from the risk-on, risk-off forces that have dominated global markets.


Although frontier markets can be highly volatile, they largely move independent of events in the United States or Europe – an attractive characteristic for many fund managers, according to chief investment Strategist at BlackRock, Russ Koesterich.
In fact, the main driver of African exchanges recently appears to have been big global and emerging equity funds taking “off-benchmark” positions in local companies – not necessarily inflows into dedicated frontier and Africa-focused funds.


These emerging market funds take small positions relative to the assets they control, but their size means bets can have a big impact.
Nigerian Breweries, for example, boast a list of shareholders that include Franklin Templeton, Oppenheimer and Fidelity, via their emerging market funds. That has helped its shares rally almost 80 per cent in US dollar terms during the past year.
“There are definitely a lot of off-benchmark bets by global emerging market funds, which is a bigger story than dedicated frontier market funds,” the Global Chief Investment Officer at State Street Global Advisors, Richard Lacaille, said.


Nonetheless, history has shown that the appetite of international investors for frontier markets such as those in Africa is fickle. If appetite for risk evaporates again, money could pour out quickly.
Paradoxically, more international investment will also gradually increase the links between local bourses and global markets, lessening one of the big attractions of African stocks. Ms Dickson said the potential returns are worth it: “You just have to do your homework.”


Meanwhile, money flowing into Africa-dedicated equity funds in the final month of last year reached $878.4 million, the biggest monthly inflow in just over two years and four times the amount in the previous month.
Weekly flows for the month of January, which have not been consolidated, are expected to be higher, the data provider said.
The increase in demand has prompted index providers such as FTSE and MSCI to create more focused indices catering to both institutional and retail investor demand.
FTSE launched a new pan-African ex-South Africa index last month and said that it was investigating the launch of regional and national indices in the near future.


“There’s no doubt that managers are being forced to look further afield for returns. Estimates for growth across Africa are very handsome compared to richer countries,” Managing Director at FTSE Group, Jonathan Cooper, said.


The FTSE ASEA Pan Africa index covers 13 countries in North and sub-Saharan Africa, excluding South Africa.


Global Head of Index Management at MSCI, which launched its Emerging Frontier Markets Africa index in 2007, Sebastien Lieblich, said the group was also looking to expand its Africa offering.
“There is an increasing appetite for Africa, from African investors wanting to invest, but also international investors wanting to get increased exposure,” Lieblich said.


The MSCI Frontier Markets Africa index includes Nigeria, Kenya and Mauritius.
However, he added, many of the region’s equity markets that have generated demand, such as Ghana, Botswana and Zimbabwe, were not yet ready to be included in regional indices because there were not enough publicly listed companies on the stock exchanges to offer in an index.


While equity capital markets activity picked up in 2012, with $4.5 billion raised through equity markets in sub-Saharan Africa, volumes are still less than half of those before the financial crisis, according to data from Dealogic.
In a related development, retail investors’ appetite is also picking up. BlackRock, the world’s largest fund manager, launched the first exchange traded fund for US investors focused on frontier markets in September. It now has $39 million under management.

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