While Europeans fear that famine and economic chaos could break out in Africa due to the war in the Ukraine, African businessmen are optimistic about the future. Given this dichotomy, where are African financial markets actually headed?
Capital News Africa: From the Trading Floor – Week 26-2022
Seldom have the views on Africa been as different as they are currently. On the one hand, European Investment Bank President Werner Hoyer warned at an event with the International Association of Frankfurt Business Journalists (ICFW) that parts of Africa could face another famine due to the lack of wheat shipments from war-torn Ukraine.
On the other hand, Hans Stoisser, a consultant for Africa based in Vienna, published a blog that gave quite a different picture. Stoisser wrote: “When I saw my partners last week in Nairobi, they didn’t mention anything about a crisis. On the contrary, the new urban middle class is doing its best to solve the problems currently facing the country. Wherever I looked, I saw very optimistic and engaged people.“
So, what is really going on in Africa? To answer this question, let’s take a look at the markets in the first half. Not all of the news is good: For example, the prominent Dow Jones African Titans 50 (ticker symbol: DJAFK) index is down 13.5% since January, having lost 10% in June alone. Things are even worse at the Nairobi Stock Exchange (NSE). This is because Safaricom (ISIN: KE1000001402), which accounts for two-thirds of the market cap for all stocks on the exchange, has lost 39% since the beginning of the year. Safaricom’s poor performance, in turn, led to a decline of 17% for the exchange’s blue-chip index NSE 20.
Meanwhile in South Africa, several big stocks have brought that country’s equity market down. One example is the tech and media company Naspers (ISIN: ZAE000015889), which has a market cap of EUR 44.2 billion. Naspers’ share has shed around 5%. The silver lining is, however, that the company’s main holding, Prosus NV (ISIN: NL0013654783) listed on Euronext Amsterdam, has begun gradually reducing its exposure to troubled Chinese tech giant Tencent. This is good news for shareholders because the government in Beijing has become increasingly restrictive on the country's tech companies.
That said, other blue chips are doing pretty well on the Johannesburg’s stock exchange. The banks Firstrand (ISIN: ZAE000066304), Standard Bank (ISIN: ZAE000109815) and Nedbank (ISIN: ZAE000004875) have put on 10%, 16.5% and 25%, respectively, since January. Petroleum firm Sasol (ISIN: ZAE000006896) has done even better, gaining more than 40%. Other winners include commodity firms like Kumba Iron Ore (ISIN: ZAE000085346), Exxaro Resources (ISIN: ZAE000084992) and Thungela Resources (ISIN: ZAE000296554), a supplier of black coal. Thungela is up a whopping 190% for the first half. Apart from banks and commodity firms, construction firms and retailers were among the winners on African equity exchanges.
But how is Africa’s economy doing? Analysts at the US rating agency Standard & Poor’s painted a bleak picture in an update published on 13 June. They wrote: “The sub-Saharan Africa region is likely to be deeply affected by surging food and fuel prices, with a high risk of social unrest. The global geopolitical shocks and their corresponding inflationary pressures are expected to weigh on regional growth moving forward.”
Interestingly, economists at Afreximbank have come to a very different conclusion about Africa’s economy. In their “Growth Prospects” report, they wrote: “Africa’s growth forecast for 2022 points to continued fortitude even in the face of heightening inflationary pressures and geopolitical risks.” To buttress their case, they cite a projection from the International Monetary Fund (IMF): “While other parts of the world have suffered sharp downward revisions, the IMF has maintained its growth expectations for Africa.”
In our view, the situation in Africa has to be seen in the proper (local) context. While Europe warns that famine could break out in Africa due to Russia’s blockade of Ukrainian ports on the Black Sea, the absence of wheat shipments would not necessarily cause such a catastrophe. This is because wheat is a luxury for the urban middle class in many African nations and not part of the standard diet.
As evidenced by the stock prices, some sectors of the African economy are profiting from the scarcity of raw materials. This presents Africa with an historic opportunity. And that is: If investments are made in the extraction and processing of vital raw materials like precious and industrial metals as well as agricultural goods, Africa could emerge from the current geopolitical crisis stronger than before.
Thanks to their higher valuations, African commodity firms could finance a big portion of this needed investment via capital hikes. After all, investors in Europe and around the world are looking for attractive opportunities. Those companies could provide it, leading to a win-win situation for both sides.