African equities have still managed to outperform SA.
Africa has long held a very ambivalent, almost bipolar, place in most investors’ minds, with even the most experienced commentators getting it completely wrong.
For example: In the early 2000s the Economist magazine’s front cover lamented ‘The Hopeless
Continent’, painting a bleak picture of a continent ravaged by war, famine and disease.
African equities (MSCI Africa excluding South Africa) promptly shot up about 8 fold in USD from mid-2002 to the end of 2007, signiﬁcantly outperforming the MSCI Emerging Markets (up only around 4 fold). Just over a decade later that same magazine boldly heralded ‘Africa Rising’ and then ‘Aspiring Africa’cover stories, which almost perfectly coincided with the top of the market. Since mid-2014 Africa is down almost 30%. Given the importance of commodities, especially oil, to African economies it should come as no surprise that the last 15 years has seen a close correlation between commodity prices and African equity performance.
Despite sustained, strong GDP growth, even in the face of market volatility, Africa has almost become ‘The Forgotten Continent’ as an investment story over the past couple of years (which is of course usually a great time for the long-term investor!) and as a result Africa is currently attractively valued. Using Price to Earnings ratio (PE) as a valuation measure we can see that African stocks are cheap on a 10X PE compared to the 12X for Emerging Markets, and 18X for Developed Markets.
On this measure South Africa looks quite expensive, also on an 18X PE. It is also probably worth pointing out, to South African investors in particular, that not only is Africa signiﬁcantly cheaper than South Africa, but even in the face of a signiﬁcant commodity spawned bear market over the past two years, African equities have still managed to outperform South Africa by almost 18% in USD over the past few years. Going forward the IMF expects Africa (ex SA) to grow at close to 4% per year over the next two years, compared to South Africa’s anaemic sub-1% growth.
While it is impossible to correctly call the peaks and troughs of commodity prices, the fact that we appear to be at, or near, the bottom for oil prices in particular, coupled with strong GDP growth and attractive valuations, suggests that now may indeed be a very good time to relook at Africa.