Sub-saharan African markets are attracting interest from foreign fund managers seeking to diversify risks in their global portfolio. André DeSimone, executive director at Kestrel Capital tells us why Africa’s stock markets continue to perform remarkably well despite their small size and low liquidity.
The global financial crisis affected African markets resulting in, among other problems, the drying up of credit lines. What is the status now?
As Africa’s financial system was not highly integrated with America’s or Europe’s, it was not so heavily impacted by the global financial crisis. Also, most African countries never experienced the sort of financial, real estate or consumer leverage that was experienced in the US and Europe, for example. Aside from a few Nigerian banks, generally the banking systems in Africa weathered the storm quite well. In fact, in Kenya, no major bank suffered badly and many, if not most, continued to record positive earnings growth over the past year. So while the days of easy credit may be gone, in places like Kenya credit is still available to creditworthy clients and real estate development continues briskly.
Is Africa the new frontier for emerging market investors?
It was somewhat remarkable that several new Africa funds were actually launched during this difficult time. While the level of trading volumes has certainly declined since 2008, there are significantly more Africa funds today than there were last year. Much of this activity is being driven by the fact that Africa remains relatively undeveloped and ripe for growth, compared to most other parts of the world like Asia, Latin America, Eastern Europe and the Mideast where industries are generally more mature. Whether one is talking about banking, telephone services, or sales of beer and cement, average per capita consumption figures are generally low in Africa. Couple this fact with the expectation of much greater development of natural resources and infrastructure over the next several years, and one sees that opportunities for growth are substantial. So yes, it certainly seems that Africa has become the new frontier for emerging markets investors and Kestrel Capital continues to see and set up accounts for new Africa funds.
What are some of the risk factors in frontier stock markets? How would you rate Kenya’s risk factor?
Historically, the concerns with frontier markets included issues like corporate governance, the regulatory environment, Government
interference and foreign exchange controls. Today, all but the last issue would apply to the USA as well. So, relatively speaking, frontier stock markets today look more attractive and developed markets less attractive.
In Kenya’s case in particular, there are no foreign exchange controls, no capital gains tax, a fully automated stock exchange, well regulated capital markets, and listed companies which all adhere to IFRS accounting standards. Moreover, the Nairobi Stock Exchange is led by many well known, large, blue chip companies with a focus on delivering shareholder value, including Safaricom, East African Breweries, Equity Bank and Barclays Bank.
Which African countries are foreign fund managers mostly attracted to?
The biggest concerns which foreign investors have in Africa are “liquidity” and “settlement”. In Sub-Saharan Africa (excluding South Africa) the biggest recipient of foreign portfolio investment has been Nigeria primarily due to its large size and trading liquidity. Other Sub-Saharan African markets which are attracting foreign portfolio investment include Kenya, Ghana, Mauritius, Zambia, and even Zimbabwe. As countries like Uganda and Tanzania automate their trading and settlement systems, we expect these countries to begin attracting more money from smaller specialized Africa and frontier markets funds.
Is now a good time for funds to acquire undervalued companies particularly in Zimbabwe?
Defining “undervalued” companies is often a matter of perception. Many companies in Zimbabwe are trading at historically low valuations for obvious reasons of political risk. Deciding to invest in Zimbabwe is a matter of one’s risk appetite. Other markets like Nigeria experienced a dramatic fall in valuations as investors deleveraged and banks stopped lending against shares. Many Nigerian banks appear undervalued but it’s unclear what further charges they may experience against earnings. In markets like Ghana, Uganda and Zambia, companies are often perceived as undervalued primarily due to low share trading liquidity which restricts many potential buyers from investing. In Kenya, for example, Kestrel Capital estimates that the stock market trades at around 13x trailing earnings which is a relatively reasonable valuation ratio as Kenya also has a relatively liquid stock market. In general, as in any market, one must weigh valuations against perceived risk, including trading liquidity and settlement, and earnings growth expectations.
What kind of investment opportunities are most likely to interest private equity investors?
As has been reported regularly in the international
press, natural resources like oil and gas, minerals, agricultural and forest products have been the primary targets of private equity investors in Africa. However, a market like Kenya which to date has not benefited greatly from any particular natural resource wealth, has witnessed substantial private equity investment in areas like banking, technology, telecommunications, energy generation and
As the continent develops further, investors will continue to look beyond basic commodities and focus more on such service sectors. Kenya is especially fortunate to serve as the effective “gateway” to greater East Africa, and hopefully as it develops it’s northern corridor transportation route, one can expect further trading with oil rich Southern Sudan and landlocked Ethiopia.
What are the implications for foreign direct investment flows of the increased risk appetite amongst fund managers?
I don’t think the increased risk appetite among fund managers has a substantial effect on FDI flows which are generally more strategic and longer-term in nature. However, larger more liquid capital markets may encourage longer term FDI flows as such capital markets may provide alternative fundraising opportunities and exit strategies for these investors.
Do you see the number of investment deals across the sectors increasing?
With regard to private equity funds, there has been a steady growth in fundraising and investing, similar to the portfolio funds which I mentioned earlier. In Kenya, we have seen a steady growth in announced investment deals across sectors, despite the global financial crisis which, as also mentioned earlier, has not had such a large impact on capital availability in Africa.
What are the prospects for Kenya’s banking and financial services sectors?
Along with media, telecommunications, technology and infrastructure, Kestrel Capital views banking and financial services as one of the bigger long-term growth stories in Kenya. Despite the recent strong growth in these sectors, Kenya is still a very underpenetrated and underserved market with respect to financial services.
What is your view of sub-Saharan African economies over the next 12-18 months?
Certainly the global credit crunch and economic slowdown has affected and will affect Africa over the next 12-18 months which means growth will be lower than previously expected. That said, Africa has its own “indigenous” growth stories including, for example, the finding of large oil reserves in Ghana and the advent of fibre optic cable services in Kenya. These are secular themes that will drive growth higher in Africa, regardless of whether or not more banks fail in the US.