african equity markets_aspirant attractive markets_may 2009

8/9/2019 African Equity Markets_Aspirant Attractive Markets_May 2009

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AfricaAspirant attractive emerging markets

Olivier M. Lumenganeso

Economist and Emerging Market StrategistMay 2009


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Key takeaways

Thecontinent has been usually disregarded by international investors.Outsiders still perceive Africa as a continent in decline, ravaged by wars, disease, famine, authoritarian governments, etc.

Most recentl howeverAfrican e uit markets have en o ed a noteworth revival due to

recovering and encouraging macroeconomic fundamentals;

commodity boom and the continents huge commodity potential;

spreadingequity culture evidenced by the rising traded volumes on these markets;

very low cor relation coefficients with global equity markets, offering very powerful opportunities for reducing portfolio

risk and volatility.

Despite this increase, the average capitalization (excluding more active markets such as South Africa and

.

Market liquidity is also low, with lower turnover ratio. Lower liquidity implies lower volumes and greaterdifficulty to support local markets with own trading system, market

analysis, and brokers.

,

decade. Studies show that the regions stock markets have begun to help finance the growth of African companies.

Furtherdevelopment, nevertheless, is required to offerbroader economic benefits (boosting domestic savings andincreasing the quantity and quality of investment).

Agenda: the continent needs to promote sound macroeconomic policies and investment climate;

establish transparent and accountable institutions as well as well-developed banking system;

Africa:asprirantattractivemarkets 2 improve adequate shareholder protection.


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Persistent clichs

3Africa:asprirantattractivemarkets


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A continent forgotten

Second largest continent on the planet, the continent has a total land mass of about 30.7 million km2 (20.2% of the Earths

land surface), a coastline of 30,539 km, and a population of 877,500,000 (2006).

It includes 53 individual countries, grouped into 5 sub-regions: North Africa (5), West Africa (16), Central Africa (12),

East Africa (10), and Southern Africa (10).

According to some observers, todays messy situation on the continent began in 1881, with the attempts by differentEuropean nations to colonize Africa. 4Africa:asprirantattractivemarkets


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A continent of poor people

Theaverage GDP is USD 49 bnat PPP(2007 estimates).

The median GDP(PPP) is USD 15 bn. , .

South Africa itself has a GDP (PPP) of USD 468 bn,

followed by Egypt with USD 431 bn, and Nigeria USD 295 bn.

Most of Sub-Saharan Africa is in the World Bank's lowest income

person per year.Ethiopia and Burundi are the worst off, with just USD 90 GNI

per person.

-

have sizeable sections of the population living in poverty.

North Africa is generally faring better than Sub-Saharan Africa.

Here, the economies are more stable, trade and tourism are.



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An assisted and indebted continent an economic tra ed

Africa receives about a third of the total aid given by governments around the world, according to the Organization

for Economic Cooperation and Development.

The Heavily Indebted Poor Countries initiative (HIPC) was set up in 1996 to reduce the debt of the poorest

countries.

6Africa:asprirantattractivemarketsPoor countries are eligible for the scheme if they face unsustainable debt (that cannot be reduced by

traditional methods). They also have to agree to follow certain policies of good governance as defined bythe World Bank and the IMF.


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An affected continent

Natural disasters are recurrent in number and frequency, and affect most countries in Africa.

The ra hic shows the amounts of eo le in millions who were affected b drou ht b famine b flood

and by epidemics related to (natural) disasters in Africa over the period 1971 to 2001.



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An affected continent

The continent is widely affected by AIDS. The overall rate of infection among adults in Sub-Saharan Africa is about 7%,

compared with 1% worldwide, according to the UN.

Ten countries in Southern Africa have infection rates above 10% and account for 30% of infected adults worldwide.

Also, on the continent, malaria kills a million children each year.



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An continent of instability

, ,



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A rich continent, full of natural resources

10Africa:asprirantattractivemarketsAfrica is rich in natural resources such as minerals, timber and oil, but trade with the rest of the world is often difficult.


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Before the storm

Unprecedented economic boom



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Better economic performance in the recent past

After man ears of economic sta nation and at times even

decline, Africa has experiencing an economic resurgence over

the last decade.

Real GDP growth picked up from a disappointingly

low rate of around 2% in the 1990s to around 3-4.5% in

the early years of this decade, before rising to more

than 5.5% in 2004-2006.

The recent growth performance has been very strong from a

historical oint of vie .



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Favorable macroeconomic policies

In aggregate, Africa has made significant advances in controlling inflation.

Inflation has fallen from 18.8% on average (GDP-weighted) in the 1980s to 6.2% for 2008e, according to IMF.

There are large differences between countries.

Africa:asprirantattractivemarkets 13

, .

In oil-exporting countries average inflation is expected to fall further, partly reflecting stabilization gains.


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Compared with the 1970s, many governments in Africa have

shown a more prudent fiscal approach to the commodity price.

In sum, the African fiscal position has improved from

a deficit of 2.7% of GDP at the start of the decade to a

1.9% surplus estimated for this year by the IMF.


countries. . .


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Stronger external balances

The regional current account position has also shown considerable

.Over the 1980s and 1990s, Africa averaged a deficit of 2.6% of GDP.

Annual net FDI into Africa averaged USD 2.4 bn through the

1980s and 1990s, but in 2007 it came in at over 10x that amount at

. .Relative to GDP, net FDI into Africa is now the second-highest among the

emerging market regions.

FDI inflows continue to be directed mainly into extractive

industries:

15Africa:asprirantattractivemarkets The IMF estimates that 70% of the gross direct investment flows to Sub-

Saharan Africa in 2006 went to oil exporters (Angola, Equatorial Guinea and

Nigeria).


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Most African countries have seen a si nificant reduction in

their debt burdens in recent years.

The drop in the debt burden was partly due to the

improved macroeconomic situation, above all in the

resource-rich countries.

At the same time, many of the poorest countries in Africa

benefited significantly from the Heavily Indebted Poor

Countries (HIPC) and the Multilateral Debt Relief Initiative

roects two im ortant international initiatives that aimed at

Africa:asprirantattractivemarkets 16reducing the debt burden of the worlds poorest countries.


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Sub-Saharan Africa has been catching up

17Buildingapotentialclientnetwork


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Main macro risks

Thehigh prices of resources in recent years have no doubt contributed to

higher growth rates.

With the commodity boom, investors were attracted to the region totake advantage of the continents huge commodity potential.

In the past, however, when commodity prices were high (particularly for

oil), governments started to spend more than their economies could absorb.

Andwhen commodity prices fell, the non-resource sectors failed to revive.



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During the storm

Note that the continent experiences a dual commodity shocks: a supply

and a demand shock.

The commodity exporting sector is the main channel through

which the actual crisis is hitting the region.

Africa:asprirantattractivemarkets 19Thanks to better policy frameworks, significant international reserves,

African countries have hardly build a cushion in case of adversity.


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During the storm-

However, relatively weak financial linkages with advanced economies have not shielded African countries from the global

economic storm.

The main shock buffeting the continent is severe deterioration in external growth, which is reducing demand for

.

The sharp fall in commodity prices is also hitting the resource-rich countries in the region hard.

Moreover, the tightening of global credit conditions is reducing FDI and reversing portfolio flows, especially to emerging and

frontier markets.


.

Source: IMF. PDI: private direct investment; PPF: private portfolio flows; OPCF: other private capital flows; OF: official flows.


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African equity markets



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African stock markets join global boom

Bourse RegionaleDes Valeurs Mobilieres (BRVM). The BRVM is based in Abidjan, Cote DIvoire for Francophone

West Africa and includes listed equities based in eight countries: Benin, Burkina Faso, CoteDIvoire, Mali, Niger,

Senegal, Togo and Guinea Bissau. At the end of 2006, these 17 equity markets (including the regional BRVM

bourse) had a total market capitalization of USD 201.6bn, a CAGR of 22.9% since 2000 (USD 58.6bn).

Only recently have Africa's financial markets attracted

significant interest from institutional investors.

Just as first-generation emerging markets

welcomed institutional investors to their e uit

Africa:asprirantattractivemarkets 22markets, African countries are doing so now.


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Capital market structure

African equity market capitalization was about 20% of GDP in 2005, comparable to the level reached by ASEAN in


.

By 2007, Africa's equity market capitalization had surged to over 60 % of GDP.


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Coincident with this strong commodity export and FDI momentum, Africa has also benefited from serial foreign debt relief.

Most of Africas debt relief was concluded in 2006.Africa's domestic bond markets are attracting interest in a way not seen in first-generation emerging markets.

Debt relief has facilitated sovereign risk ratings of African countries by the three major rating agencies ,

especially S&P and Fitch, being sought and concluded.

While these ratin s tend to be clustered at the low end of the sub-investment rade scale the rovide the startin


point for a cross-country and continental comparison of relative risk.


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Trading of domestic and foreign debt in the international

markets has accelerated rapidly.

mergng ar es ra ers ssoca on aa s ow

that trading in Africa's debt markets (excluding South

Africa) more than tripled in 2007, reaching about

USD12 bn.gera, as e arges counry n s group, omnaes e

trade.

During 200506, Nigeria received Paris Club debt

relief and bought back much of the remainder of its

ex erna e .

Since then, trade in Nigerian debt has beenmainly in domestic issues.

Nigerian debt trading ranked 21st globally at the end

o . s s equa o or excee s many rs -

generation emerging markets.

Using a variety of investment vehicles, Nigeria's

banks raised about USD 12 bnin capital over 2006, .

Ghana successfully entered the international capital market in September 2007 by issuing a USD 750 mnbond issue.

It was more than four times oversubscribed; total bids exceeded USD 3.2 bn.

Africa:asprirantattractivemarkets 25Gabon followed in December with a USD 1 bnbond issue to repay Paris Club debt.

The terms were similar to those for Ghana.


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gyp, gera, ou rca an m a we are e excep ons, w respec vey , , an companes s e .

Theaverage number of listed companies on Sub-Saharan African markets, excluding South Africa, is 39, compared

with 113 if Egypt and South Africa are included.

Market capitalization as a % of GDP is as low as 1.4 in Uganda.

Africa:asprirantattractivemarkets 26e o annes urg ecur es xc ange n ou rca as a ou o e com ne mar e cap a za on o e

entire continent.


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participation in the local equity markets.

It is true that most African markets on

average trade less than USD 5 mn a day.

,

with an average traded value of USD 1.1 bn in 2007.



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Performance has been strong

Africa:asprirantattractivemarkets 28Source: UBS, S&P.


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,

Africa:asprirantattractivemarkets 29The S&P Africa 40 index provides exposure to 40 of the largest, most liquid companies that operate purely in Africa. To provide broad exposure across several African countries,

the index limits the number of companies from any single country to eight and includes developed market listings of companies domiciled in Africa or that have the majority of theirassets and operations in Africa.


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Africa:asprirantattractivemarkets 30Source: UBS, S&P.


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What drives performance?

,

High commodity prices and, to a lesser extent, better

macroeconomic policies have been behind the strong equity

performance.

Since 2004, Sub-Saharan African

equities have even been negatively

correlated with emerging markets!

North African countries, Egypt and

Morocco, due to their inclusion in the S&PEmerging Markets Index, however

show a stronger relationship with other

mature emerging equities.

Emer in market funds that can la African markets directl will rea the

Africa:asprirantattractivemarkets 31benefits of diversification.


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Agenda



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Any economic rebound just after the storm?

For the region as a whole, growth is projected to decline

from 5 in 2008 to 2% in 2009.On average, the downturn is most pronounced in oil-

exporting countries(Angola, Equatorial Guinea) and in

key emerging and frontier markets (Botswana,

Mauritius, South Africa).ap a ou ows are orcng a s arp a us men n asse

prices(mainly in equity, bond, and currency markets) and

in real activity.

The deep downturn in economic activity across the

regon an e s arp ec ne n oo an ue prces w

temper inflation pressures.Nevertheless, for the region as a whole, inflation is

projected to decrease only gradually from 10% in 2008

, -

price changes to consumer prices is more limited.

Fiscal and external balances are expected to deteriorate

substantially.

- ,position of the region is projected to deteriorate (by

about 5 % points) toa deficit of 4 % of GDP in 2009.

Thecurrent account balanceof the region is also

projected to worsen, from a surplus of 1% in 2008 to a

Africa:asprirantattractivemarkets 33Source: IMF.

deficit of 6% of GDP in 2009.


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Political stability


E i f d


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Economic freedom

35Africa:asprirantattractivemarketsIt is still difficult to do business with the continent, particularly with more fragile African countries.

Cl i th i i f t t


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Closing the gap in infrastructure

According to the World Bank, Sub-Saharan Africa lags behind the average of International Development Association

countries on almost all major infrastructure.


,

operations and maintenance.


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Conclusion and agenda: the rise of new frontiers

Following the global surge in world stock markets overt the fewdecades,African financial markets have also started to take off.

But, with some exceptions, African financial markets remain smaller,

less so histicated and illi uid than those in the more advanced

emerging markets.They qualified, however, to become part of the second generation

of emerging market, the so-called frontier markets.

As agenda, for the region to garner broader economic benefits fromfinancial markets, they need to

promotesound macroeconomic policies and investment

climate;

establish transparent and accountable institutions as well as

well-developed banking system;

improveadequate shareholder protection.

Successful emerging market countries feature the private sector as

the engine of growth.r can counres,w eveopng nanca mar es avea race

more international private and institutional capital.Studies show that, in these countries, stock markets become an

important source of long-term external financing.

,continueto support private sector development and that private

property rightswill be protected.Africa generally fares poorly in measures of the attractiveness

of the business environment.

37Africa:asprirantattractivemarkets Stronger performance in this area is likely to be well

rewarded wi th additional investment.


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Whos who in Africa: a scorecard at glance


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Whos who in Africa: a scorecard at glance


African equity performance


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the index limits the number of companies from any single country to eight and includes developed market listings of companies domiciled in Africa or that have the majority of their

assets and operations in Africa.



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the index limits the number of companies from any single country to eight and includes developed market listings of companies domiciled in Africa or that have the majority of their

assets and operations in Africa.

Selected statistics


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Selected statistics


Selected statistics


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Selected statistics


Selected statistics


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Selected statistics


Selected statistics


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Selected statistics

Source: IMF.


Selected statistics


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Selected statistics


Sub-Saharan Africa has been catching up


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g p




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p

A good proxy for the impact a country is enjoying or

suffering as a result of changing world market prices of

resources and other goods are the terms of trade (ToT).

The terms of trade are measured as the ratio of

(weighted) export prices to (weighted) import

prices of a country.A rise, i.e. an improvement, in the terms of trade

means that for each unit of exports, a country will

have to pay less for imports (or alternatively, for

each unit of imports a country needs to export

less .

The IMF database provides ToT data for 48 African

countries.21 countries (44%) had experienced an

im rovement in their ToT between 2006 and the

average of 1997-2001, while 27 countries had

suffered a deterioration.

The simple average of the group of 48 countries

has seen a ToT im rovement of around 10.9%.However, the median of the sample shows a

deterioration of 10.3%.This means that the average improvement of

10.9% was dominated by a small number of oil-

Africa:asprirantattractivemarkets 48exporting countries which saw very sharp

improvements in their ToT.



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p

.

Annual net FDI into Africa averaged USD 2.4 bn through the

1980s and 1990s, but in 2007 it came in at over 10x that

amount at USD 27.1 bn.

,

second-highest among the emerging market regions.

FDI inflows continue to be directed mainly into extractive

industries.

investment flows to Sub-Saharan Africa in 2006 went

to oil exporters Angola, Equatorial Guinea and Nigeria.The Asian contribution to Africas FDI has picked up.

,

Africa were mainly from the Asian newly industrializing

economies (Hong Kong, Korea, Singapore and

Taiwan).

,significant sources.




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p

In Sub-Saharan Africa, private capital inflows have risen

rapidly in recent years, particularly to South Africa and Nigeria,

reflecting the favorable global environment and foreigninvestment in natural resource production.

Although private capital flows to Sub-Saharan Africa

are still dwarfed by those to regions such as Asia, they

have nonetheless tripled since 2003.

In 2006, total gross private flows amounted to about USD 45

bn, almost 6% of GDP, compared with about USD 9 bnin 2000.Since mid-2005, private foreign investors have been acquiring

government debt in local currencies, particularly in Botswana,

Kenya, Malawi, and Nigeria.

This surge reflects improved domestic fundamentals in

recipient countries as well as the favorable global

economic environment.




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p

In aggregate terms, total African FX reserves increased from

less than USD 50 bnin the mid-1990s to USD 100 bnin 2002,

before rising exponentially to more than USD 300 bnby end-2006.

A relatively large majority of 41 out of 46 countries (for whichdata is available) managed to increase the U.S. dollar value of

their reserves since 2003 a development that was also

influenced by the decline of the U.S. dollar since 2001.


Top export product by country


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Africa:asprirantattractivemarkets 52Source: OECD

China as the superpower?


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,much needed infrastructure improvements.

Also, Asian contribution to Africas FDI has picked up.Traditionally, FDI flows from developing Asia to Africa were mainly from the Asian newly industrializing economies (Hong Kong, Korea, Singapore and

Taiwan . More recentl , China and India have become more si nificant sources.

Africa:asprirantattractivemarkets 53Many African countries view Chinese investment as an opportunity and welcome Beijings strictly business policy of

noninterference in domestic affairs.

Corruption perception index


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african equity markets_aspirant attractive markets_may 2009

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