Much has been made of Africa’s rapid economic growth. And it truly is remarkable. The IMF projects that seven African economies will grow faster than 8% this year, and six of the top ten fastest-growers economies in the world will come from the continent.
The table below lists the IMF’s projected GDP growth for the home countries of 10 of Africa’s most prominent stock exchanges. I’ve included the United States, too, just for kicks.
Note that the growth figure is a weighted average of the IMF’s forecast for each year between now and 2017. Because predictions are generally less accurate the further you look into the future, the more distant years are weighted less than those that will soon be upon us.
Africa’s Rapid Growth
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Those are some pretty impressive growth rates, aren’t they? Especially when viewed in comparison with the United States.
Based on the above, it would be tempting to conclude that we should all be opening Zambian brokerage accounts.
Unfortunately, investing solely on the basis of growth forecasts often ends in disappointment. Rapid economic growth doesn’t necessarily translate into awesome stock market returns. In fact, studies show there is no correlation between the two.
Just look at China. According to the IMF, China’s economy expanded by a cumulative 64.8% over the past five years. So, if stock market returns were correlated with GDP growth, the China 25 Index should have knocked the lights out during that time frame. Instead, it only managed an anemic 13.1% (2.5% annualized).
So, we need to temper our excitement over growth rates with a keen focus on value.
To do so, I’ve put together average Price/Earnings ratios for ten of sub-Saharan Africa’s most important stock exchanges in the table below. The ratio is an average of the 10 largest domestic companies traded on each exchange. I’ve also included the S&P500 for giggles.
African Stocks’ Deep Value
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Namibia looks pretty cheap, doesn’t it? You can pretty much buy $1 dollar’s worth of Namibian earnings for half of what a dollar’s worth of S&P500 earnings costs. In fact, even after years of relative stagnation, the S&P500’s P/E ratio remains higher than every single African index.
But Namibia and Botswana may be cheap, in part, because they just aren’t growing very quickly.
So to get a true sense of where investment opportunity lies, we need to combine value’s yin with growth’s yang.
To do that, I simply divided the above P/E ratios by the GDP growth rates of their respective home countries. The resulting Price/Earnings/Growth ratios are listed below.
Putting Growth and Value Together
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Based on this quick analysis, the Ghana Stock Exchange offers the most compelling opportunities for Africa investors thanks to its combination of deep value and rapid economic growth.
Does this sound right? Let us know which market you think offers the best overall value in the comments!