Market update - Why investors should be allocating more to African markets
Despite the news flow from Africa that typically focuses on the worst issues and incidents that occur on the continent, we believe that the underlying fundamental changes happening in the better economies are irreversible and will continue to generate significant growth.
African equity markets recovered strongly over 2017 with the MSCI Emerging and Frontier markets Africa ex South Africa index gaining 18.1% and a further 4.9% year to date in 2018. Despite these gains we believe that this is just a return from heavily oversold levels and that markets can continue to provide good returns for investors in the medium term.
During his budget speech last month, the (now former) Finance Minister of South Africa, Malusi Gigaba increased the prudential limits that allow pension funds to invest a portion of their members’ funds outside of the country. Specifically, the limit for African investing was raised from 5% of the pension fund’s assets to 10%.
There are many reasons why we believe investors, and South Africans in particular, should allocate more of their retirement savings to African equities. Here are some of the key considerations:
In our December commentary we elaborated on the expected GDP growth for economies that have investable equity markets, which is expected to accelerate from 3.5% in 2017 to 4.0% in 2018.
To illustrate the diversification benefits, we have calculated the correlation for the US dollar returns of the respective indices on a rolling 12-month basis from 2 June 2002 until 10 January 2018. Over this extended period, Africa ex SA has a very low correlation to global markets of 0.24 and to South Africa it is even lower. To further illustrate the diversification benefits of investing across the continent, we can see that the two biggest markets, Nigeria and Egypt, also have a low correlation to each other of 0.16.
Source: Bloomberg, Ashburton Investments
In other ways too, Africa is marching to its own drum. We expect inflation to decline by about 6% in 2018 for African countries with equity markets. This is at a time when global inflation is rising.
The less developed nature of African equity markets lends itself to active fund management, meaning that selecting shares can add value over investing in an index (by 3%-4% per annum). The following chart shows the returns for an investor in the Fund compared to the MSCI Index for Africa ex South Africa.
Source: State Street, Ashburton Investments, Bloomberg. Fund price net of fees and costs.
The Fund has maintained its total exposures to Kenya and Nigeria broadly in line with the index, although the underlying holdings vary considerably. The Fund still has its largest exposure to Egypt, where the Egyptian pound has started strengthening. Morocco remains the Fund’s largest underweight as we view the market as expensive.
As mentioned above, with many economies across the continent on a recovery path and inflation declining, we expect interest rates to start coming down. This will be positive for equity markets that will also start anticipating the generally improved economic outlook for the continent in 2018 and beyond.
The content or fund you have selected is not available for the profile or region you have selected.
Please select one of the options below to return to the site.