War in Israel and the election of Robert Mugabe in Zimbabwe seem to have sealed the fate of equity markets within Africa and the Middle Eastern regions as places that are off limits to the vast majority of foreign portfolio investors. Most believe that many of these countries offer little prospect for growth, mainly because the economies are not run in a way that encourages development for all but a small section of society. This also implies poor levels of governance and transparency, with the interests of inside vested groups far outweighing the need to protect minority investors. Looking at the performance of a sample of these countries' currencies then, it is surprising that currencies, which should ultimately reflect the relative health of these economies, have not performed particularly poorly over the last year. In fact most have fared better than the euro against the dollar.
Currency exchange rates versus USD
| Currency | end 2000 | end 2001 |
|---|---|---|
| Kenyan shilling | 78.05 | 78.6 |
| Nigerian naira | 110.00 | 120.00 |
| Ghanian cedi | 7275.02 | 7400.01 |
| Saudi riyal | 3.75 | 3.75 |
| Egyptian pound | 3.89 | 4.58 |
| Moroccan dirham | 10.56 | 11.52 |
Source: Reuters, FactSet
This is the case for a number of reasons, but perhaps the most important is the strength of key commodity prices, in particular oil, which has driven large capital inflows into the Middle East and Nigeria. More recently, strength in cocoa and gold will have considerably benefited economies such as Ghana considerably.
The success of the OPEC cartel at fixing oil prices must be seen within the context of rulers in the Middle East wanting to avoid change and reform. They are essentially propping up inefficient economic systems by making the rest of the world pay. High oil prices will therefore not attract foreign portfolio equity investors, because high oil prices are helping to maintain the status quo and avoid the need for reform. Most countries across Africa (Nigeria excepted) do not benefit from oil. Political systems, even dictatorial ones consequently end up facing two choices: either withdraw the country's economy from the international economy to cut dependence on foreign capital flows, which usually means giving up on the standard notions of development (this seems to be the route being adopted by Robert Mugabe) or attempt to embrace the sort of policies that providers of foreign capital (in the first instance the aid agencies) want to see. In Ghana, Nigeria and Cote d'Ivoire significant changes of leadership have been required to move towards this objective. Political change is attracting some aid money back to these countries, which is another factor explaining why their currencies have held up so well recently.
The performance of local equity indices demonstrates a clear and less encouraging pattern. Investors in equities in countries with oil have made a killing primarily due to abundant domestic money supply -- it is unlikely that most of the oil inflows have been sterilised by central banks and sterilisation has its limits. Equities in countries without oil have performed much less well because institutional structures needed to allow markets to flourish are still not in place even if economic growth has been good.
Local equity indices
| end 1999 | end 2000 | end 2001 | |
|---|---|---|---|
| Nairobi Index | 2303 | 1913 | 1355 |
| Lagos Index | 5396[*] | 8012 | 10963 |
| Ghana Index | 736 | 858 | 956 |
| Saudi Index | 2029 | 2258 | 2430 |
| EFG Index | 5759 | 3528 | 2228 |
| Casablanca Index | 777 | 728 | 610 |
[*] price at 16 Jan 2000
Source: Reuters, FactSet
This suggests two things from an investment point of view. Firstly, things cannot get much better in the oil-rich markets. Valuations are on the whole not cheap and the good news concerning oil is probably discounted. Secondly, in the non-oil markets the potential for a re-rating does exist but is wholly dependent upon economic reform. It is extremely doubtful that the reform will be implemented in many countries across Africa for the age old reason that the individuals who need to push the process through are probably benefiting disproportionately from the way things are run at the moment. Ghana and Uganda look like the best candidates for change, and prices of some assets -- such as property in the capital cities -- are rising rapidly, reflecting the new sense of optimism. Foreign equity investors however are unlikely to give these countries the benefit of the doubt before significant and sustained improvements are made.
Two markets that will remain on investors' lists are Israel and South Africa. Most Israeli technology companies are really US-based companies and a few offer compelling growth prospects at very low levels of valuation following the technology bust of the last two years. It is of course very difficult to say which 'few' because the technology area changes so quickly. A small handful of companies have continued to grow earnings during the downturn. These include TTI Telecom and ECTel: both providers of equipment that enables telecommunications companies to run their networks more efficiently, thereby saving money.
The South African economy has been haemorrhaging money for years as companies and individuals who accumulated assets during the apartheid era quite rationally try to get this wealth out of the country in anticipation of having to give some of it back. This process has left the currency as possibly the cheapest in the world at present, suggesting the possibility of a genuine industrial renaissance -- especially as the government's overall economic policy framework has remained very market-friendly. Equity valuations are cheap against most markets and many companies are run on first world standards operationally and from a governance perspective. The case for investing in Africa must start with its biggest and best economy and at this point in time the case seems pretty compelling.
The views and personal opinions expressed in this article are purely those of Jonathan Asante, a fund manager at Framlington Investment Management Limited, and do not necessarily reflect the views of Framlington Group, or its associates as a whole or at all.
