At the third Annual Trading Africa Summit, a Thomson Reuters event held last week in Cape Town, South Africa, a number of discussions took place concerning the investment opportunities in African equity markets.
In light of the title of this year’s event, ‘Africa – the hype, the myth or reality’, Claire Rentzke, head of manager research at multi-manager investment advisory firm 27four Investment Managers, explored six ideas concerning investing in African equity marks.
1. African equity markets are not that volatile
A common perception around African exchanges is that they are highly volatile. However, Rentzke said research shows that in a period of five years African markets are only marginally more volatile, according to MSCI indices.
“There isn’t really a marked difference between developed countries and African frontier markets [over a five year period],” said Rentzke. “In fact, if you look at the volatility of the MSCI World index it has been more volatile than some of the African indices.”
2. The South African rand is more volatile than many African currencies
A common concern among equity investors is that the volatility of African currencies could negatively impact returns. According to Rentzke, the South African rand is more volatile when compared to a number of other African currencies. South Africa is generally perceived as one of the continent’s more stable economies and the Johannesburg Stock Exchange (JSE) is the largest bourse on the continent.
“If you look at the volatility of some of the African currencies, the rand stands out as being by far the most volatile,” she said referencing a graph comparing the volatility of global currencies against the US dollar.
3. Company disclosure, financial accounting and governance are improving
According to Rentzke, another concern surrounding investing in African equity markets is that African companies don’t disclose relevant financial information and their accounting standards are dubious at best. However, she said that many African countries are now compliant with International Financial Reporting Standards (IFRS), which are a set of accounting standards designed as a common international language for business affairs so that a company’s accounts can be compared and understood globally.
“And very many [African markets] have actually moved to quarterly reporting,” added Rentzke. “So they are improving. Companies are providing more disclosure and they are moving towards complying with global standards.”
4. African markets have rallied but it’s not too late to get involved
Another apprehension heard by investors is that the period of sustained increases in the prices of stocks in African markets is over and it’s now too late to get involved and invest.
“In terms of the equity market, yes they have done very well recently, but if we take it back and look at the longer term picture, well there is still quite a lot of catch-up that the markets can still do,” said Rentzke.
“Valuations are still looking favourable so, at varied stages, other [African] countries, relative to the JSE, still look a lot better valued than the local South African market.”
5. Bigger is not always better
“Well the bigger funds [in Africa] might have attracted more assets because they have had better performance but in terms of looking at the investable universe, as soon as you move to a fund that is above a billion US dollars, suddenly the investable universe is decreased quite significantly,” explained Rentzke. “Liquidity still does play a big role in the investment opportunities.”
6. South African and foreign listings don’t offer the whole story
Some investors believe they can tap into the African growth story through South Africa via the JSE, which they might view as being more mature, and therefore less risky, than other African exchanges.
“In terms of accessing Africa through South Africa or through other international markets, yes a lot of companies listed on the JSE do provide exposure to the African growth story. But it is always a percentage of revenue, it’s never the whole story and that’s the same for some of the European listings as well. So in terms of the sales generated out of Africa and Africa markets, it’s never a pure African play like you could potentially access through the markets themselves,” said Rentzke.