With the exception of South Africa, public equities in sub-Saharan Africa are generally cheap. Buyers, however, are in short supply.
Some contrarian investors see the dearth of buyers as an opportunity to gain a foothold in those exchanges before they become crowded and expensive.
“You have to invest now when people are negative. When everybody loves Africa, maybe in a few years’ time, then you leave,” says Andrew Lapping, the Cape Town-based deputy chief investment officer at Allan Gray, an asset management firm.
Sub-Saharan Africa, which is home to more than 40 countries, has only 13 stock exchanges. Because the valuations are low, regional companies prefer to raise capital by selling shares to private equity investors rather than going public, according to Lapping. “If you sell your [shares or] business to a private equity investor, you’ll probably get a better price. Usually, high market valuations encourage new listings,” he says.
The result is a small number of new listings on sub-Saharan exchanges, something Lapping thinks isn’t going to change soon.
Despite the limitations, there are attractive stocks in areas such as the banking sector.
Equity Bank—a Kenyan microcredit bank with branches in Tanzania, Uganda, Rwanda and the Democratic Republic of Congo—is currently trading at about 37% discount to its fair value, says Gaëtan Herinckx, a Cape Town-based portfolio manager at asset manager Sustainable Capital. Equity declared insolvency in 1993, but has since rebounded. Its market capitalization today is US$1.5 billion, Herinckx explains.
Home to more than half of Kenya’s bank accounts, Equity Bank has a fast growing loan book. During the first nine months of 2015, it saw loan growth of 27% over the first nine months of 2014, says Herinckx.
Investors also see opportunities in Nigerian banks. Nearly all of them trade at a discount, with many of the large ones trading at about 40% of net book value, says Lapping.
But “banks are risky because Nigeria is going through an exceptionally difficult period at the moment,” he says, noting the impact of falling oil prices.
Further, Nigeria has fixed its currency at 200 naira to US$1, “which is probably not sustainable” given the lingering weakness, says Lapping.
“People are very worried about [Nigerian banks] going bankrupt because of bad loans, and we think a few may go bankrupt, but the survivors should do well,” says Lapping, whose firm has holdings in five Nigerian banks, including the country’s biggest lender, First Bank.
Investors exploring these frontier markets should plan to stay there for a long time to offset the risks, says Lapping. “You can’t come in and out because transaction costs are quite high, the markets are fairly illiquid—so it takes time to accumulate positions—[and] brokerage rates are quite high.”
And, if there’s one word that could sum up the risk in the entire region, it’s volatility, says Lapping. In other words, the timing is perfect for contrarians. “It’s a great opportunity to pick up these stocks when people are overly pessimistic,” he says.
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Yaldaz Sadakova is associate editor of Benefits Canada. email@example.com