The Robeco Afrika equity strategy recently celebrated its tenth anniversary. A good moment to look back on how African economies and their financial markets have evolved, and think about what the next ten years may bring.
The timing of Robeco Afrika’s launch was horrible, as it came after a spectacular five-year rally in Egypt (+1275% cumulative return in euros), Kenya (+340%), Nigeria (+335%) and South Africa (+160%). A lot of optimism was already priced in. Valuation multiples outside South Africa were relatively high initially and came down over time. The rerating of developed markets in conjunction with a derating of African markets was a major cause of the latter’s weaker performance.
When the strategy was launched, most people expected more African countries to open up their capital markets and many more initial public offerings. These have not materialized, although there have been quite some follow-on offerings where listed companies have raised additional money. Most of these happened in South Africa as other big economies like Algeria, Angola and Ethiopia still don’t have a well-functioning stock market.
In the last ten years, various African countries have gone through difficulties related to politics, falling commodity prices, currency problems and economic mismanagement. However, the biggest threats have either been tackled effectively or warded off by favorable global developments. As a result, the economic outlook for Africa looks much better than it has done for a long time. The most important African countries appear to be in relatively good shape and less risky than in the past.
The financial health of the government and the credibility of many institutions were severely damaged after nine years of corruption under president Zuma. Fortunately, current president Cyril Ramaphosa has started to clean up the government, the public sector and state-owned enterprises. Business confidence is now recovering, also as a result of increased investment that should boost economic growth.
During most of 2015 and 2016, Egypt’s economy suffered from its central bank’s refusal to allow its currency to depreciate. Foreign investors shared the pain, as they could not get money out of the country. In November 2016, the currency was finally devalued. This removed growth obstacles and made it easier for companies to export goods. Tourism recovered due to an improvement in the security situation.
Other positive drivers are big infrastructure projects made possible by funding from development institutions, European countries and Gulf allies. Lastly, spectacular gas discoveries in recent years will significantly cut the import bill. Although the political situation is far from ideal, in the short term, businesses and the economy are likely to do well in this more stable environment.
From early 2015 to August 2017, Nigeria was unattractive for new investors, not only because of significantly lower oil prices and the decline in oil production due to unrest in 2016, but also because of the country’s refusal to devalue the naira and make it convertible into US dollars for investors and corporates. However, in 2017, oil production recovered as the situation stabilized and the oil price rose. This improved the government’s financial health and reduced the need for significant devaluation. So when the naira was devalued by 15%, in Nigeria it was widely seen to be trading at fair value. This enabled investors to enter the Nigerian market, while local businesses could access US dollars more easily and function properly again.
The economy came out of recession in 2017. We expect economic growth to pick up further this year to around 2.5%.
Since the bloody riots after the 2007 elections, Kenya has experienced a period of relative political stability and solid economic growth. However, the risks of wide-scale violence and prolonged uncertainty increased when the opposition refused to accept the victory of incumbent president Kenyatta in November 2017. Fortunately, in March opposition leader Odinga announced he would work with Kenyatta to foster national unity. The truce was incentivized by project funding promises from the US and the European Union. This will reduce uncertainty and lead to a resumption of major government projects and private sector investments.
While many frontier and Africa funds focus only on the few relatively big and liquid African markets, Robeco Afrika has already invested in markets like Botswana, Ghana, Senegal and Zambia. We see these markets developing further and hope they will come onto the radar screens of more investors. We also hope that in the next ten years more African countries will open their capital markets and we can be an early entrant there too. There are signs that Ethiopia is becoming more willing to attract foreign equity capital. Government officials in Angola and Algeria have indicated they are planning to develop their stock markets. Still, if there’s one thing experience has taught us, it’s that we will have to be patient.