The common finance theory about money is that it doesn’t discriminate when it comes to investment. It usually flows to where the returns are highest, irrespective of the location. Given this premise and in the light of the current investment environment, we appraise and evaluate major markets across sub-Saharan Africa in terms of opportunities and where returns are the highest.
To make our comparisons more meaningful, we chose some macro-economic indicators and financial metrics. Although, we agree that regulatory reforms also play significant roles in sustaining the identified opportunities, we believe that global and market integration tends to make uniform all major markets, though the level of regulatory sophistication differ.
Ghana – attractive yield and equity return
The Ghanaian market and economy is one of the emerging markets with abnormal growth in the last few years. The economy recorded 14.4 percent growth in 2011, the highest in the world but however tempered to 8.2 percent in 2012. The drivers of the growth have been government’s privatisation of its parastatals and flexibility in it economic policies. Although, Ghana is an import dependent economy like Nigeria, inflation figure at double digit: 10.4 percent on average has been a major challenge. Baring any unexpected expansionary fiscal or monetary policy, the Ghanaian authorities should successfully curtail inflation within single digit.
In terms of investment capital flow, it is one of the sub Saharan African economy enjoying foreign capital inflow into especially the capital market. Its capital market is fast gaining traction. Presently, the Ghanaian stock market ranks 4th in terms of market capitalisation among the countries we compared viz South Africa, Ghana, Egypt, Kenya and Nigeria. From the highest to the smallest; South Africa ($829.10bn), Nigeria ($67.71bn), Egypt ($51.57bn), Ghana ($29.31bn), and Kenya ($17.83bn).
The Ghanaian capital market, though small, is one of the most attractive, especially with major macro-economic data showing encouragement and opportunities. The Exchange with close to 40 listed companies has returned 50.12 percent so far in 2013 ( in 2012 it returned 22.71%).
In terms of pricing, it is currently trading at a P/E of 13.48x, the second lowest amongst the countries we compared in this report. Market dividend yield is 3.04 percent.
Even factoring exchange rate risk (Ghanaian Cedi has depreciated 6% YtD), average return on about 17 stocks is above 15 percent. Secondly, its high interest rates (MPR is at 15%) will continue to attract foreign capital to government instruments.
Kenya – attractive equity return
The Kenyan market has been the toast of foreign investors in the last few years following the development of tourism in the country. Kenya has the lowest inflation figure at 4.10 percent among the countries compared here. After the initial fear of the possible outcome of the country’s presidential election, Kenyan shilling has appreciated 2.8 percent YtD, better than peers that have depreciated in varying degrees.
A look at the Nairobi stock market shows encouragement. With about $17.83 billion market capitalisation and 60 listed companies, the exchange has returned 25.44 percent YtD (second highest). The market returned 39.44 percent in 2012FY. This was better than the Nigerian 35.45 percent but came behind Egyptian market with 50.8 percent return. Kenyan market currently trades at 14.97 percent with the average market dividend yield of 3.29 percent.
Nigeria vs. South Africa
The Nigerian Stock Exchange which is the second largest in Africa by market capitalisation ($67.71bn) has been of great interest to foreign and local investors over the past 9 months. Nigeria’s average 7 percent GDP growth rate is an indication of growing industries and companies. The stock market return has been largely driven by impressive fundamental performance of companies (particularly in the Banking sector), attractive dividend expectations and stock market reforms.
Nigeria was among the top performing markets in 2012 with the benchmark index returning 35.45 percent and 17.64 percent so far in 2013.
Exchange rate remained relatively stable through out 2012 though its currency volatility of 1.57 percent is one of the least in the region. The decline in yields on fixed income instruments due to the huge demand pressure also contributed to the stock market rally as funds were diverted to stocks with higher returns. The current market P/E at 18.16x may appear high when compared with Ghana’s 13.48x, but the depth of Nigerian market and increasing opportunity have largely been responsible for investors’ bullishness, hence, higher P/E. Nigerian market has assumed a downtrend recently having hit a high of 23.04 percent; some investors seem fairly cautious while others have been taking profits on prior gains.
South Africa’s Johannesburg Stock Exchange (JSE) is Africa’s largest stock market with $829.10 billion market capitalisation and also one of the continent’s most sophisticated and efficient. The economy also ranks as Africa’s largest though GDP growth rate at 2.50 percent is low when compared with Nigeria (7%) and Ghana (8.20%).
The stock market returned 23.13 percent in 2012, but has lost 0.57 percent YtD. Its exchange rate volatility however is relatively higher than most of its top peers; the Rand has depreciated by 7.64 percent in 2013 given the country’s integration with the global market, especially Europe.
However, the market’s 16.61x price to earnings multiple stands below Egypt (18.89x) and Nigeria (18.16x). Trading activities on banking, industrial and resource stocks appear to be the drivers of market return. Thus, expectations on the performance of the companies in these sectors may significantly determine the direction of its index.
