IMF Remains Upbeat on African Growth

While the rest of the world has had to deal with contraction, Sub-Saharan economic growth has continued largely unabated. World output, forecasted by the International Monetary Fund in its recently published “World Economic Outlook”, is projected to fall from 3.9% to 3.5% for 2012, but Sub-Saharan Africa is expected to grow from 5.1% to 5.4%, exceeded only by China, India, and other emerging Asian economies.

This guest post is by Tom Cleveland of ForexTraders.com.

GDP growth prospects exceed 5.4% in 2012.  Export industries are on the rise.  Tourism is expanding.  Government stability is increasing.

Are these headlines from one of Asia’s emerging economies?  Most certainly not!  These economic realities relate to the Sub-Saharan Africa (“SSA”) region and its member states.

The benefits of positive growth dynamics are not spread equally throughout the region, but the differences are small and understandable, leading to a higher prosperity level that has been years in the making.

While the rest of the world has had to deal with contraction, Sub-Saharan growth has continued largely unabated.  World output, forecasted by the International Monetary Fund in its recently published “World Economic Outlook”, is projected to fall from 3.9% to 3.5% for 2012, but the SSA region is expected to grow from 5.1% to 5.4%, exceeded only by China, India, and other emerging Asian economies.  Data for each Sub-Saharan Africa country are depicted in the diagram presented below:

Not all countries will show accelerated growth in 2012, but all are expecting positive GDP growth rates for year over year.  South Africa, Nigeria, and Ghana’s combined growth forecasts exceed the region as a whole, but different conditions prevail in each country.  South Africa, heavily dependent on trade with Europe, is the lowest performer in the group.  Nigeria continues to benefit from the petroleum industry, and Ghana has joined in with oil production beginning last year.  The Cedi has depreciated 20% versus the Greenback over the period, but expectations are that mining companies will soon reverse the trend.

Photo by World Bank

The crisis in Europe has caused many nations around the world to ratchet back their growth forecasts due to diminished European demand for imported goods.  In many regards, these downward revisions have had little impact on SSA countries, with the exception of South Africa.  Exports to Europe constituted a 40% share of trade for SSA countries in the early 1990’s, but through a concerted effort to diversify exports to other emerging markets around the world, this dependence on Europe has been halved over the past two decades.

The region has also benefited from the run up in commodity and agricultural prices over the past few years, but, even though a downturn has been realized in market prices in 2012, economic growth prospects remain positive.

A further deterioration in Europe, however, could slow demand in these crucial markets, such that Sub-Saharan Africa markets are not completely immune to the goings on up north.  Exports might suffer, but remittances and capital flows might also be impaired.  After the crises in Europe and Japan in 2011, there has been a steady flow of repatriation of banking and corporate funds back to their respective homelands to prepare for the worst.

Capital flows in emerging markets can be very fickle for these reasons, and officials in Sub-Saharan countries must be mindful to encourage the inflow of investment capital to the region.  Major funding is needed for infrastructure, health, and educational needs, which cannot be met by local investments alone.

Officials must also be mindful of complacency.  It is easy during high-growth periods to respond to immediate needs while ignoring fiscal deficits and the ravages of inflation, which has been high but is abating.  Budgetary discipline is a necessity to buffer the impact of downside risks, should they occur.

Sluggish growth in South Africa may be a problem, but for now, economic prospects in the Sub-Saharan region are stellar.

Tom Cleveland has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development. From 1980 until 1999, Tom served as CFO for various Visa International entities, retiring with the title of Group EVP and Treasurer. Currently, Tom researches economics and writes columns for ForexTraders.com. Tom’s most notable work within forex education is his “Trading Psychology” series.

Does Investing In African Stocks Help The Poor?

I met a returned Peace Corps volunteer a few years ago. He’d served as a school teacher in Kenya in the late 1960’s, and, like me, he’d felt an affinity for the continent ever since.

As we chatted, I told him about my interest in investing in African stock markets. He was intrigued by the idea but made clear that it wasn’t his cup of tea. “Something about profiting off of Africa doesn’t feel right to me,” he said.

I met a returned Peace Corps volunteer a few years ago. He’d served as a school teacher in Kenya in the late 1960’s, and, like me, he’d felt an affinity for the continent ever since.

As we chatted, I told him about my interest in investing in African stock markets. He was intrigued by the idea but made clear that it wasn’t his cup of tea. “Something about profiting off of Africa doesn’t feel right to me,” he said.

Ouch.

The comment stung because it insinuated that I wasn’t investing — but profiteering.

It implied that the relationship between Africa and the rest of the world should be one of donor and recipient. A place apart where investors should not expect a fair return.

Photo by Dietmar Temps

I’ve never perceived the benefits of investing in African stocks to be a one-way street. Quite the contrary, I believe participation in African markets is a vote of confidence in the continent’s future that benefits both Africans and investors. Unfortunately, I could muster no articulate defense of this belief at the time.

So, in the event that you meet a similar skeptic, I will try to make the case that investing in African stock markets actually precipitates economic development — and thus combats poverty.

African stock exchanges allow companies to grow more rapidly

Suppose a cement company sees an opportunity to expand into a market where concrete is in heavy demand. They will need to build a new plant to compete in the market, but building a manufacturing plant isn’t cheap, and the company doesn’t have enough cash on hand to finance construction.

So management is left with two basic options — seek a loan (debt) or sell a stake in the company (equity).

Debt is a straightforward option. The company takes out a loan from a bank or other lender and repays it over time. The disadvantage is that debt isn’t free. Interest charges will cut into the profits from the new plant. Plus, the more indebted a company becomes, the more difficult it will be get additional loans.

Equity, on the other hand, comes at a lower cost. Investors pay in capital to the company in exchange for partial ownership in the form of stock. The holders of these shares will have a say in the management of the company, but only in proportion to the size of their holding. The company essentially gets a free infusion of expansion capital.

The cement company opts to raise equity capital on the local stock exchange. It lists shares in an initial public offering (IPO), investors purchase the shares, and the company uses the proceeds to build its new cement plant. The cement plant employs hundreds of people and lowers the cost of cement in the region – combating poverty through job creation and reduced cost of living.

African stock markets help stem capital flight

A middle class African citizen has saved a small nest egg and is looking for a place to invest it where it can earn a return higher than the interest rates offered by banks. So, he or she invests in a UK or US-based mutual fund. In countries without formal tax collection processes, it’s likely that the government will miss out on tax revenue on dividends and capital gains collected by the investor. The investor’s home currency will also be weakened in relation to every pound or dollar he or she purchases.

If this same investor had the option of investing in a local stock exchange, the capital may never have left the country. Taxes could have been collected with each transaction and the depreciation of the currency would have been avoided.

So, a local stock exchange can put additional revenue in government coffers, which can, in turn, be invested in education or health.

African stock markets facilitate privatization

Let me be clear, that I have concerns about the privatization of certain services – like electricity, water, and health care. But many African governments run a host of enterprises that are probably best owned privately. Everything from breweries to farms to airlines. These companies, by and large, are not run terribly efficiently and, at worst, facilitate corruption and cronyism.

Stock markets provide a vehicle for these state assets to be sold to citizens and other investors. The state is rewarded with a big boost in revenue that it can redeploy to more essential sectors. And the privatized companies can begin to operate more efficiently.

It’s all about the liquidity

You may now be wondering how purchasing a thousand shares of Kenya’s Equity Bank and selling them a year or two later does anything to reduce poverty. You aren’t, after all, participating in an IPO or the listing of a formerly state-run company, and any taxes collected from your transactions would be minuscule.

But your transactions do create liquidity – the ability of a stock to be bought and sold quickly with little change to the market price.

See, most enterprises require long-term commitments of capital, but most investors don’t want to tie up their funds for long periods. Liquid share markets address both of these concerns. Through listing on a liquid stock market, a business can be reasonably confident of a capital base from which to grow. Investors, meanwhile, rest assured that they’re able to withdraw their assets whenever they wish.

A snowball effect soon develops. Higher levels of liquidity attract more investors, who, in turn, create more liquidity. As the demand for shares increases, so do share prices, which benefits the enterprise by allowing it to raise capital even more easily. Privately held businesses soon begin to see advantages to listing. They join the market; attract investors; and the process repeats itself.

It’s not difficult to see how this would promote economic growth over the long-term. But economists have gone ahead and tried to prove it anyway. And after accounting for a wide range of factors, including inflation, political stability, education, fiscal policy, and banking development, studies show increased levels of market liquidity to be a great indicator of future economic prosperity.

Given this evidence, I see little reason why socially conscious investors should abstain from participating in African markets. Find a company whose mission and practices you feel comfortable with and by all means invest. And then re-invest! The returns are greater than those appearing on your account statement.

What Do You Think?

Are stock markets a serious tool in the fight against poverty? Should they even be seen as such? I’d love to hear your thoughts in the comments!

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

 

A Dark Continent Brightens: Africa’s Tangible Progress Since TEDAfrica 2007

In June 2007, a diverse group of African visionaries gathered in Arusha, Tanzania. It was the first (and so far only) TEDAfrica conference.

In the opening speech, Euvin Naidoo made an eloquent case for investing in Africa. He cited a number of “bellwether” indicators of the continent’s progress. That was nearly five years ago. How much progress has been made since then?

In June 2007, a diverse group of African visionaries gathered in Arusha, Tanzania. It was the first (and so far only) TEDAfrica conference.

In the opening speech, Euvin Naidoo made an eloquent case for investing in Africa. If you haven’t already seen it, watch it. I’m sure you’ll find it to be 19 minutes well-spent.

So, that was nearly five years ago. How much progress has been made since then?

Naidoo gave his audience a plethora of “bellwether” indicators of Africa’s progress. Let’s look at ten of them and examine what strides have been made to date.

1. Changing Attitudes

2007: Naidoo begins by asking his audience to call out the worst things they’ve heard about Africa. It’s the predictable litany. Famine, disease, war, slavery. He was trying to illustrate the dominant perception of the continent.

2012: The world’s perception of Africa is changing for the better as this 2011 Ernst & Young study indicates. Nearly 70% of the international investors surveyed for the report believed that Africa’s attractiveness had improved over the past three years.

But, there’s still a long way to go before the continent completely dispels of its negative image. Note that only 38% of North American investors felt Africa’s attractiveness had improved.

Photo by NASA Goddard Space Flight Center

2. Improving Electrification Rates

2007: Naidoo next moves on to a satellite photo of earth at night. Africa is conspicuously dark save for a few little glow worms of light around major cities. He uses the photo as a metaphor for the continent’s potential.

2012: That satellite photo was taken in November 2000. At that time Sub-Saharan Africa’s electrification rate was only a shade above 20%. In 2009, the most recent data available, the International Energy Agency estimated it to have increased to 30.5%. Still quite dark, but notably improved. Unfortunately, I haven’t been able to locate an updated satellite photo for comparison.

3. Slowing Inflation

2007: Next, former investment banker that he is, Naidoo made note of decreasing rates of inflation across the continent. He highlighted two countries in particular. Zambia’s inflation decreased from 18% in 2004 to 9% in 2006. And Nigeria, where inflation slowed from 16% to 9% over the same time period.

2012: Many African nations have reined in inflation over the past five years. Nigeria’s inflation quickened, but, as you can see in the chart below, many of Africa’s most developed economies now have single digit inflation rates. And some are even below the 5% mark.
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4. The Rise of the African Consumer

2007: Naidoo then highlights Bain Capital’s purchase of South African retail group, Edcon, as a bellwether indication of progress. Investing in retail, he says, is a long-term bet on the growth of the African middle class.

2012: Fast forward to 2012 and international confidence in the African consumer continues to rise. Walmart purchased a controlling stake in South African retailer Massmart last year. That’s a development that could transform the sector in not just South Africa, but the rest of the continent, too. Clothing retailers, Zara and Gap, have also opened their first stores in Africa in recent months.

5. The Promise of Nigeria

2007: Much of the talk focuses on the progress and exciting potential of Africa’s most populous nation, Nigeria. Naidoo notes Nigeria’s importance to the US as an oil producer, its reformed banking sector, and its rapid growth, which prompted Goldman Sachs to predict would put it among the world’s top ten largest economies by the year 2020.

2012: The years since TedAfrica have been turbulent ones for Nigeria. Oil production was frequently interrupted by aggrieved local communities. Corruption remained a major problem. And, more recently, the terrorist group Boko Haram has renewed fears of religious violence. Even so, Nigeria grew rapidly during the period, with GDP per capita expanding at an annualized rate of 4.2%. The number of mobile phone subscriptions has increased from 32 million in 2006 to 87 million in 2010. Internet access more than quintupled from 8 million users to 45 million during that same time frame.

6. Agricultural Improvements

2007: Naidoo details some exciting agricultural developments on the continent, including the development of an organic food industry in East Africa.

2012: Jump ahead five years and we find that Tanzania’s value-added agriculture (which includes organic produce) increased by nearly 20% between 2006 and 2010, according to World Bank figures. In Ethiopia, it jumped 32%!

7. Africa’s Booming Banks

2007: Naidoo next remarked on the potential of the banking sector and the reforms taking place in Nigeria that consolidated that country’s 85 banks into 25. He noted that only 10% of Nigerians were banked.

2012: Five years later, and 36% of the Nigerian population is now served by the formal financial sector. Analysts at Bain Capital expect the sub-Saharan banking industry to continue growing at 15% annually all the way to 2020.

8. Roads, Roads, and more Roads

2007: In an effort to illustrate Africa’s potential and the infrastructure constraints that were holding it back, Naidoo made note of the lack of adequate paved roads in Africa. As of data available in 2007, only 30% of Nigeria’s roads were paved; 20% of Zambia’s roads were paved; and 10% of Angola’s roads were paved.

2012: World Bank staff estimated in a report published last year that 45% of Nigeria’s roads are now paved; 35% of Zambia’s roads are now paved; and 24% of Angola’s roads are now paved. It doesn’t take much of an imagination to visualize how good this development is for business.

9. Africa’s Stock Markets: No Longer So Sleepy

2007: The presentation includes reference to the outstanding performance of the Egyptian, Kenyan, and Nigerian stock exchanges in 2005 and 2006.

2012: While African stock exchanges posted respectable returns over the past five years, I think a better indicator of capital market development is the total value of stock traded. The more active the exchange is, the more meaningful contribution it makes to the national economy. Take a look at the Nigerian Stock Exchange. Total value traded on the market surged 48% between 2006 and 2010, according to data from the World Bank. In Ghana, trade volume nearly doubled!

10. More Sovereign Credit Ratings

2007: Near the conclusion of his talk, Naidoo references the growing number of African countries who had received sovereign credit ratings from the major ratings agencies. Naidoo explained that this development would portend greater integration into the global investment community. In 2007, 16 countries had received ratings.

2012: As of the end of 2011, 22 African nations had been rated by either Standard & Poor’s, Fitch, or Moody’s.

Turning on the Lights

Early in his talk, Naidoo quoted the geographer George Kimble. Kimble said, “the darkest thing about Africa has always been our ignorance of it.” It’s an insightful obervation – and, as the data above attests, it’s one that becomes even more true with each passing year.

Related Reading

The Common Yellow Crane

A Different Drummer: Correlation (Or Lack Thereof) Between African Stock Markets

Most African stock markets, as we saw last week, were every bit as volatile as US markets during the past five years. In fact, most were downright capricious. So why would anyone apart from an utter adrenaline junky even entertain the thought of investing in such markets? Diversification. Perhaps counter-intuitively, the more volatile assets that a portfolio contains the more stable it becomes. While some stocks zig, the others zag. That’s one reason why fund managers like to invest in emerging market stocks. They tend to be less correlated with the S&P500, and, therefore, help smooth a portfolio’s performance. The less correlated a stock is to the overall portfolio, the greater its diversification benefit.

Like many investors, market volatility shook me into a silly stupor these past few years. Rather than taking advantage of price dips, all too frequently I just sat on the sidelines and watched my portfolio whipsaw.

Most African stock markets, as we saw last week, were every bit as volatile as US markets during the past five years. In fact, most were downright capricious.

Take a look at this five-year chart to get a sense of just how seasick Nigerian investors must feel. In the month of January 2009, the MSCI Nigeria Index plunged more than 41% in US Dollar terms. The next month it rebounded 26%. And then in March it swung 13% lower only to be followed by a 14% gain in April. Whew. I got nauseous just typing all that.

So why would anyone apart from an utter adrenaline junky even entertain the thought of investing in such markets?

The answer is diversification. Perhaps counter-intuitively, the more volatile assets that a portfolio contains the more stable it becomes. While some stocks zig, the others zag.

That’s one reason why fund managers like to invest in emerging market stocks. They tend to be less correlated with the S&P500, and, therefore, help smooth a portfolio’s performance. The less correlated a stock is to the overall portfolio, the greater its diversification benefit.

By Timothy Vogel

We measure correlation on a scale that ranges from -1.0 to 1.0. The closer the coefficient gets to either end of the spectrum, the stronger the correlation. A correlation coefficient of 0.9, for example, would indicate that two assets move nearly in lockstep with one another. A negative coefficient of -0.9, on the other hand, shows that the two assets react in almost opposite directions – when one drops, the other rises. Finally, a coefficient of 0.0 suggests the assets move completely independently of one another.

The chart below shows the correlation of monthly, currency-adjusted returns for a number of African indexes, the MSCI Emerging Market Index (EEM), and the S&P500 index since January 2007.

Bots Ken Mau Nam Nig SA Tan Uga Zam S&P 500 EEM
Botswana 0.15 0.39 0.38 0.25 0.31 0.05 0.12 0.44 0.40 0.36
Kenya 0.15 0.44 0.27 0.15 0.44 0.37 0.84 0.25 0.51 0.43
Mauritius 0.39 0.44 0.40 0.32 0.45 0.08 0.43 0.53 0.52 0.55
Namibia 0.38 0.27 0.40 0.35 0.75 0.26 0.23 0.20 0.56 0.73
Nigeria 0.25 0.15 0.32 0.35 0.32 0.11 0.23 0.51 0.20 0.40
S. Africa 0.31 0.44 0.45 0.75 0.32 0.20 0.34 0.19 0.79 0.89
Tanzania 0.05 0.37 0.08 0.26 0.11 0.20 0.30 0.23 0.07 0.12
Uganda 0.12 0.84 0.43 0.23 0.23 0.34 0.30 0.36 0.46 0.34
Zambia 0.44 0.25 0.53 0.20 0.51 0.19 0.23 0.36 0.39 0.32
S&P 500 0.40 0.51 0.52 0.56 0.20 0.79 0.07 0.46 0.39 0.83
EEM 0.36 0.43 0.55 0.73 0.40 0.89 0.12 0.34 0.32 0.83

Note the strong correlation (0.83) between the S&P500 and the Emerging Market Index. The strength of the relationship shows just how interconnected global financial markets have become. It also suggests that adding emerging markets to a domestic stock portfolio provides a relatively limited diversification benefit.

South Africa’s Johannesburg Stock Exchange, with its 0.79 correlation to the S&P500, is a full-fledged emerging market. It is large and liquid, making it a favorite of fund managers desirous of exposure to the African growth story. The downside to this accessibility, however, is that it is likely to be hit first (and worst) when global markets take a tumble.

The next strongest correlation is between Kenya’s Nairobi Securities Exchange and its Ugandan counterpart. Investors from Kenya and Uganda can easily invest in one another’s markets. And landlocked Uganda is almost entirely dependent on trade routes through Kenya. Thus, Kenya’s 2008 political crisis hurt the Ugandan index more than it did the Kenyan stock market!

The markets of South African and Namibia also exhibit a strong relationship. The neighboring countries share a customs union, a currency linkage, and a lot of history. Thus their stock indexes tend to move in a concerted fashion.

Apart from those few relationships, however, African stock exchanges move together about as closely as do a herd of cats.

For example, the Nairobi Securities Exchange, one of the two largest African frontier markets, is essentially uncorrelated with its large West African counterpart, the Nigerian Stock Exchange.

Tanzania’s tiny Dar es Salaam Stock Exchange moves to the beat of its own drummer. Botswana’s stock exchange isn’t strongly correlated with any other market, and doesn’t appear to be at all correlated with East African stock indexes. Finally, the Lusaka Stock Exchange in mining-dependent Zambia is (perhaps surprisingly) not correlated with similarly mining-focused South Africa.

So, as you can see, a few well-chosen African stocks can go a very long way toward reducing a portfolio’s volatility. Who’d have thunk it? Apparently, the real adrenaline junkies are those that don’t invest in Africa.

Related Reading

Hitch Your Investments to Africa’s Demographic Freight Train