IABFM Articles

IABFM Articles > > Markets > Africa Best Kept Secret

Africa Best Kept Secret

By MICHAEL PREISS

05 April, 2012

Strategic investing has a lot to do with the notion of what is risky and what is safe. Risk in financial markets is like beauty—it is in the eye of the beholder. The question isn’t whether an investment is risky or not; it is what returns we can expect for assuming this risk.

Kofi Annan, ex-UN secretary general, once noted that “Africa’s profitability is one of the best kept secrets in today’s economy.�� African markets are often considered ‘risky�� by global investors but still o!er some of the highest returns on investment in the world. The US subprime crisis and now the European sovereign debt crisis have turned many investors�� perceptions of risk and safety upside down.

The opportunities are great for those willing to engage in longterm strategic investment activities in Africa but the continent’s stock and currency markets are underresearched and overlooked. It is not widely known by Western investors, for instance, that the share price of Ecobank in Ghana has risen by 300% since the end of 2007. By comparison, Citibank, once considered one of the ‘safest�� banks in the world, almost went bankrupt and its share price declined by more than 93% during the same period.

In the long run, true value is always revealed, but in the short term, markets and individual stocks are pushed and pulled by a variety of forces—portfolio rebalancing, rumors, news, investment fads, seasonal tendencies—factors that have nothing to do with the fundamentals.

Many African stock markets are ‘cheap�� on valuation measures when compared to Western and Asian markets. Economists expect some positive surprises to emerge from several African economies during 2012 and investors who use information flows to form intelligent expectations about the market’s probabilities of trading up, down or sideways, will prosper.

Financial markets have boundless capacity for reacting to news and economic developments in a way that confounds market professionals and retail investors alike—the only di!erence being the latter will quickly come up with a few dusty rationalizations. Economist and founding father of the World Bank, John Maynard Keynes, put it best when he remarked: “Nothing is more suicidal than a rational investment policy in an irrational world.��

Egypt is a good reminder of this timeless investment adage. The EGX30 Index has not only been Africa’s best performing market this year, the Egyptian Exchange is also the world’s best performing stock market with an increase of about 45% in returns year-to-date.

Returns on the Lusaka Stock Exchange (LuSE) in Zambia increased 18.3% last year, making it the third best performing stock market globally. This trend, however, has not been maintained into 2012; the local market is 10% down and is now the world’s second worst performing stock market. An economist will tell you this is due to ‘reversion to mean��, or in plainer terms; what went up will decline sooner or later, and what went down a lot should recover over time, if it doesn’t go bankrupt first.

The correction and pullback on the LuSE is a healthy development�� markets hardly ever rise in straight line. As Africa’s largest copper producer, Zambia is one of the most attractive long-term investment stories in Africa. The new government’s decision to remove three zeros from the kwacha and Zambia’s debut Eurobond issue of $700 million are very encouraging developments.

Year-to-date, in US dollar terms, most African markets are up: Namibia 16%, South Africa 13%, Kenya 8.4%, Botswana, 4.6%, Ghana 4.3%, and Nigeria 1.1%.

When it comes to investing, ‘the trend is your friend�� and you should try to remain open-minded and flexible.