Where to Invest Now: Africa’s Cheapest Stock Market

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.

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.

To get a true sense of where investment opportunity lies, we need to combine growth’s yang with the yin of value.

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.

Photo by World Bank

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!

Further Reading

How to Invest in Ghana

How to Invest in Zambia

How to Invest on the BRVM

 

6 thoughts on “Where to Invest Now: Africa’s Cheapest Stock Market”

  1. Definitely Ghana is the place to be for me when it comes out to invest in Western Africa. It may not be as lighthearted as its big neighbor, but its attractiveness lies on a combination of strong growth, abundant resources, better democratic climate and clear governance and development agenda. And the P/E/G multiple suggests it’s cheaper. In the Southern part of the Continent, I will buy Namibia. Smaller than its big Neighbor, but attractive too. And another way to stay invested in South Africa with cross-border listed stocks with Jo’bourg… See: “The Impact of the Regional Cross-listing of Stocks on Firm Value in Sub-Saharan Africa”, IMF WP09/99, by Olatundun Janet Adelegan. Anyway, maybe we may need more valuation multiples to price those markets (EV/EBITDA for example) to be sure we have same accounting factors (EV/EBITDA/GROWTH should be even better) …

    1. Thanks for mentioning the IMF report, Olivier. I’m going to track down a copy.

      Good point about EV/EBITDA, too. It’s a much more accurate metric than P/E. Sadly, it takes so much longer to calculate. Thus, I often take the expedient route. Are you aware of a database that publishes EV/EBITDA for African firms?

  2. Thank you for posting this! This information is very resourceful. Do you have a magazine? I would be interested in purchasing a copy. Thank you.

    1. You’re quite welcome, Nana. I don’t currently publish a magazine, but make sure you sign up in the green box at the side of this page to be alerted by email whenever we publish a new article.

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