- Low trading liquidity likely explains recent underperformance of Africa equities more than differences in fundamentals
- Much more liquid LatAm markets have outperformed despite similar commodity exposure, stalling reform and fiscal risks
- Egypt (cheap) and Mauritius (tourism) over SA (fiscal risk), Nigeria (FX risk), Kenya (expensive), Morocco (low growth)
Africa's equity markets have trailed global peers in the recent rally probably because of low levels of trading liquidity rather than poorer fundamentals. This should mean that they should catch up after a lag. Indeed, it is no accident that the most liquidly traded African market, South Africa, has been the continent's outperformer in the global risk-on rally.
Africa is no less geared to the bump in commodity export prices and no less chequered in terms of sluggish reform and accumulation of debt than Latin America, where much more liquidly traded equity market peers have rallied sharply this month.
Egypt remains our top country pick in the region's equity markets: for all its flaws (Army commercial dominance, water scarcity), it is cheaper, more politically stable (at least, in the near term), faster growing, with more stable FX outlook than regional peers. We also highlight Mauritius because of its cheap valuation and gearing to a Tourism recovery.
Fundamental similarities of Africa and LatAm
Two differences: Tourism exposure in Africa's favour, equity trading liquidity in LatAm's favour
Within Africa, Egypt and Mauritius our top picks
Fundamentally, Africa equities, top-down, are less appealing than those in the smaller Asia markets, because there is generally less structural reform and a less clear path to job-creating, manufacturing exports.
But within the region, Egypt still offers the best mix of cheap value (c25% discount to 5-year average PB and PE), growth, orthodox policy, currency stability, and stable domestic politics. The Army is still too dominant commercially, economic growth is not keeping pace with that of the labour force, and there is long-term vulnerability to water scarcity. But Egypt is attractive relative to its continental peers.
South Africa — stalled reform of state-owned enterprises, lack of fiscal control, and divisions within the ruling ANC party between moderates and leftists;
Nigeria — restrictive currency policy (which takes locally-listed stocks off the radar for fresh investment by foreigners) and political risk stemming from the potential transition back to a southern presidency in 2023;
Morocco — slow growth (or, more accurately, a disconnect between foreign direct inward investment into manufacturing and job creation and consumption growth among the mass population), the health of the King, and Western Sahara vulnerability (in terms of impact on fiscal balance and EU tariff negotiations);
Kenya — expensive equity valuation (with the highest premia to 5-year average PB and PE in the region) and a seemingly irreconcilable split within the ruling coalition; and
Zimbabwe — hyperinflation, currency restrictions and absence of any progress on external debt arrears.
In addition to Egypt, we also highlight Mauritius because of its high exposure to the Tourism sector, where recovery globally should ultimately follow Covid-19 vaccine deployment, and very cheap valuation relative to history.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...