Given the bashing that emerging markets were dealt in 2018, it is notable that valuations are looking more attractive in early-2019 than they have for quite some time. However, beyond valuations, a number of trends are emerging that may be useful in determining where to look for winning trades. We turn the spotlight on Africa as a whole, Brazil, China and India and outline key developments which could shape opportunities in the year to come.
Africa – A continent in transformation
Over the past few years the political environment across the African continent has been improving. There have been positive changes in South Africa, Angola and Zimbabwe, despite some setbacks in Uganda, Burundi, Zambia and Tanzania. Although it is difficult to generalise across the 54 countries which comprise the African continent, we make use of the Economist Intelligence Unit’s Democracy Index to determine trends for the continent as a whole. Their score is based on the ratings of 60 different indicators and considers whether the environment is conducive to a fair vote, even if elections take place.
Although the global average score for 2017 is essentially unchanged from 2010 (5.48), countries in Africa that have investable equity markets have improved from 4.76 to 5.34 on average. Even more impressive is the number of Africans living in authoritarian regimes that has declined from 703 million (74% of the population) to 538 million (48%) over the same period.
This improvement in politics is impressive, but it is not the key driver of the changes in economic growth for the continent. There is no one-size-fits-all approach which one can apply to the whole of Africa, which is why attempting to understand the dynamics in different regions and markets is so essential.
To gain a full picture, Ashburton Investments, as part of the FirstRand Group, can also draw on the likes of the 2019 RMB Where to Invest in Africa report. This study outlines Africa’s 20 best investment destinations for the coming year based on a 50% economic activity score, which considers the likes of market size and growth, and a 50% operating environment assessment. The latter considers issues such as global competitiveness, economic freedoms and the perception around corruption. The report draws on World Bank and International Monetary Fund data. Top of the ranking is Egypt, followed by South Africa, Morocco, Ethiopia, Kenya, Rwanda, Tanzania, Nigeria, Ghana, Cote d’Ivoire, Tunisia, Mauritius, Botswana, Uganda, Algeria, Senegal, Zambia and Cameroon. Burkina Faso and Angola make up the bottom two.
As this glimpse tells us, and as we have noted in previous Global Perspectives editions and other publications, the economies on the continent are transforming. Ultimately it is this transformation that is driving a large portion of the growth we are seeing.
While these changes are to be welcomed, it must be said that businesses on the continent are used to dealing with difficult and changing business environments and rules. What is key looking to a future impacted by transformation and change is that the business environment is continuing to improve (see sidebar) and this will continue to help businesses to grow their revenues at lower costs.
India – A connected, digital society
India’s upcoming national elections will certainly dominate the headlines in the near term. But, whichever way the electorate vote, India’s surge towards digital is unstoppable and will remain a key theme in the months and years to come.
Facilitated by embracing new and innovative technologies, Indians are experiencing greater financial mobility, be it in the larger cities or the smallest villages.
Domestic consumption will continue to advance rapidly as disposable income levels rise steadily, particularly as rural workers migrate to urban centres and become less reliant on farming for their income. As an example, buoyed by a youthful and aspirational population, India will witness e-commerce growth of 10 times within the next decade, resulting in more than US$450 billion spent online by Indian shoppers.
Although Amazon India is one of the leading players in this consumption trend, there are local companies, some listed and yet even more unlisted, that will fulfil the retail desires of Indians across the country.
Data pricing in India is some of the cheapest globally and, when accompanied by the greater affordability of smartphones, is leading to exceptional levels of data consumption, again a strong indicator of the acceptance of transacting online.
Consumption will ride on the back of this technological wave, and it will be domestically focused. Therefore, it is a key component of the Ashburton Chindia Equity Fund.
China – A maturing market
While we adopt a systematic and quantitative approach to allocating capital and managing risk in China, there are five ‘themes’ that are likely to generate significant news flow for those investors accessing Chinese equities in 2019:
- Internet concerns to persist. Regulators have moved aggressively to curtail what more than 750 million internet users in the country can or cannot do online. These limitations are forcing many of China’s leading companies to look for alternative sources of monetisation channels.
- Made in China 2025. Traditional subsidies are increasingly unsustainable. Instead, government guidance funds firms have become the new financial engine to power ‘Made in China 2025’. This is primarily led by central and local governments, but also banks, large state-owned enterprises and private firms.
- Financial deleveraging. China’s domestic deleveraging campaign is primarily responsible for the pain being felt within the economy. Deleveraging will continue in 2019, but the focus will switch to redirecting credit flows away from local government financing vehicles, state-owned enterprises and households and towards private firms. This should lead to an acceleration in the capital expenditure of small- and medium-sized enterprises.
- The Chinese semiconductor space. China’s acceleration of efforts to develop its domestic semiconductor industry is designed to reduce its dependence on the United States. Policies are being initiated to direct technology transfers from military and aerospace applications to civilian firms, a clear acknowledgement of the United States model. Funding and talent are available in sufficient size and quality.
- China’s consumption story is intact. The aspirational aspect of China’s Millennial generation, who are willing to spend to enjoy a better quality of life, is demonstrated by a willingness to spend more on children’s education, travel, health and fitness. There is significant potential for upgrading in many discretionary and staples categories.
Brazil – A nation intent on reform
The Brazilian currency, the real, has been one of the star performers in the early 2019 emerging markets forex rally and, after the horror global equity market ending to 2018, there are some opportunities on hand for the year ahead.
Newly-elected Brazilian President Jair Bolsonaro has announced plans to embark on much needed pension fund reforms, which are needed to reign in Brazil’s huge budget deficit, ignite investor confidence and bolster much-needed economic growth. Brazil’s costly state pension fund system is the primary cause of the chronic budget deficits that Brazil currently runs.
Essentially, the Bolsonaro administration is aiming to privatise this element of social security. This follows the widely-adopted and successful model that Latin American neighbours Chile already adopted in the late 1980s when they shifted to a private pension fund contribution model. That shift is credited with boosting savings and added enormous liquidity to the stock markets. If Brazil is successful in its intended reforms there may well be a significant boost to both the stock market as well as the outlook for the real.
Tracking the ease of doing business in Africa
The World Bank’s Doing Business 2019: A Year of Record Reforms, Rising Influence report was released in late-2018. The accompanying graph shows selected information and some analysis of the data contained in the report. Using the World Bank’s ease of doing business score we are able to assess the level of improvement in the ease of doing business over time.
Source: The World Bank Doing Business 2019, Ashburton Investments
The graph clearly shows that our observations of improvements on the ground can be backed up by the World Bank’s detailed analysis, which makes use of 11 indicator sets to measure aspects of business regulation that matter for small- and medium-sized businesses. The business environment for Africa (excluding South Africa) has, on aggregate, continued to improve in line with the trend experienced earlier in the century.
According to the World Bank, Sub-Saharan Africa has been the region with the highest number of reforms each year since 2012. More than a third of the reforms which the World Bank researchers captured across the globe in the latest release were from 40 economies in Sub-Saharan Africa. As an example, the average time to register a business in the region has declined from 59 days in 2006 to 23 days. The researchers identified 10 economies with the most notable improvements in their latest survey and the list included five African countries, namely: Djibouti, Togo, Kenya, Côte d’Ivoire and Rwanda. Kenya jumped 20 positions to be ranked 61st in the world, while Rwanda gained 11 places and is now ranked 29th, ahead of Spain, Russia and France.
In the World Bank’s view, Mauritius is the easiest place to do business on the continent and is ranked 20th out of 190 countries, ahead of countries such as Canada, Ireland and Germany.
Other articles in this issue of Global Perspectives
- Dust yourself off…
- A world still in transition
- Oil market sets up opportunity on the horizon