This time for Africa

(with apologies to Shakira)

In 2010 I spent a very enjoyable three weeks in South Africa; in Johannesburg, Pretoria, Durban and Cape Town for the 2010 World Cup. The anthem for World Cup 2010 South Africa was a very catchy tune, “Waka Waka (This time for Africa),” by Colombian singing sensation Shakira, who also played halftime at the most recent Super Bowl.

The title of the song was very apt at the time. The World Cup was a seminal event for the continent. The mood was buoyant, and African economies were rebounding sharply after the GFC.

It was a time of great optimism for Africa. And, in the years that followed – until sometime in late 2014, African stock markets also did very well.

However, in the 5 years since 2015, African stock markets have given up all those gains, and then some.

There are still many wonderful African business success stories, such as Safaricom in Kenya, whose shares are up 424% from 5.55 Kenyan shillings to 29.10 Kenyan shillings since the beginning of 2010. (Not including dividends).

If you had invested $25,000 in Safaricom then, you’d be sitting on $131,000 today. And, all the while, collecting dividends for a decade.

But for many African equities it has been a struggle in recent years. Total returns for the African benchmark indices compiled by S&P are negative, or barely above zero, if you include dividends, over the past 10 years as a whole.

Here’s the S&P Pan Africa index, which includes the Emerging Markets of South Africa and Egypt, as well as all the Frontier Markets…

Though hard to tell from this chart, it’s down 23% over 10 years, if you look purely at the current index level. But, if you consider the “total return” including dividends reinvested, it’s up 6% in total — or 0.58% a year.

Prior to the recent sharp decline due to the coronavirus pandemic, the long-term performance was actually quite a bit better, at around breakeven, not including dividends. 

However, the bizarre thing about this index is that the biggest constituent, by far, is South African media company Naspers. And Naspers’ main asset for nearly the entire period covered in this chart was an early-stage investment in Chinese internet juggernaut Tencent, the performance of which had nothing to do with Africa at all.

So, for a much better illustration of how Africa itself has been doing, here’s the S&P Africa Frontier BMI Index, which leaves out the two “emerging market” countries, South Africa and Egypt.

Incidentally, this is one index I’m looking to benchmark my soon-to be -launched African Lions Fund against. You can see that when you catch a move off the bottom of this index, sparks can really fly. It basically DOUBLED in just two over years between 2012 and early 2015.

I’m not saying that will happen again. But it is certainly possible off such a low base as we have now

For the past 10 years, this index has lost 6.5% per year if you don’t include dividends. If you do count dividends, and assume they were reinvested, this index has lost 1.7% a year.

But if you notice, the first 4 ½ years of the last decade were characterized by good performance. And since then the index has gone down precipitously.

As my earlier column showed, much of this has to do with foreign investment funds leaving. Those money outflows have pushed African equity prices down.

And that’s precisely the reason I am so bullish now. Prices are very cheap, which makes little sense if you look at the improving fundamentals.

As of May 29th the S&P Africa Frontier BMI index was trading on a multiple of 6.16x last year’s earnings, and just 5.74x this year’s projected earnings.

The price to book value is 0.97 times. And the indicated dividend yield is 8.11%.

Compare that to the S&P 500 in the USA, on a trailing multiple of 22.9x, book value of 3.4x and dividend yield of 1.92% and it puts into stark relief the incredible value on offer in African equity markets right now.

I probably don’t need to remind you either that, right now, it’s the USA where there are riots and troops on the streets, deep political and social divisions, and heightened country risk NOT in the parts of Africa where I am investing. 

I know where I’d rather be investing my capital for the next 10 years or more. And that’s exactly why I’m launching my African Lions Fund in the fourth quarter this year. If you missed out on investing in the Asian Tigers, do yourself a favour and don’t miss the African Lions.

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