Dear subscriber,
We are happy to share with you the latest issue of Capital News Africa, your weekly newsletter about African financial markets. It is published every Monday. Every Thursday, we invite you to read an in-depth analysis of a selected topic in our weekly editorial “From the Trading Floor.”
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After Russia’s invasion of Ukraine on Thursday, international financial markets tumbled. However, the reaction on African capital markets was more nuanced. Of course, the invasion led African stock markets to trend downward. South African media conglomerate Naspers (ISIN: ZAE000015889), for example, shed 2% on Thursday due to the exposure its Dutch investment subsidiary Prosus (ISIN: NL0013654783) has to Russian internet company Mail.Ru Group. Prosus owns a 27.2% stake in Mail.Ru.
But several African stocks posted gains despite the market turmoil caused by the invasion. This was particularly true of natural resource companies. Centamin Egypt (ISIN: JE00B5TT1872), for example, was up 6.9% last week on the London Stock Exchange (LSE). Centamin is a mining company that extracts precious and base metals from the Sukari gold mine in eastern Egypt. On the Johannesburg Stock Exchange (JSE), Impala Platinum (ISIN: ZAE000083648), a supplier of platinum metal, gained 11.6% to ZAR 280 (EUR 16.25). The share prices of Sibanye Stillwater (ISIN: ZAE000259701), South Africa’s leading supplier of gold and other precious metals, and of Gold Fields (ISIN: ZAE000018123), one of the world’s largest gold-mining companies, also rose by around 8%.
However, we would like to advise investors to remain cautions regarding the commodities sector. We don’t expect the prices for African oil and mining stocks to automatically rise amid the conflict in the Ukraine. Take Nigerian oil and gas group Oando (ISIN: NGOANDO00002). The share price has actually trended downward despite the conflict. Therefore, you should be very careful in your stock selection on African markets.
A few years ago, the world’s biggest names in private equity discovered the African continent. Blackstone, Carlyle, TPG Group, Warburg Pincus and KKR – they all launched funds which aimed to invest hundreds of millions of dollars in sub-Saharan Africa. Unfortunately, the firms’ actions did not really match the rhetoric. All have since withdrawn from the continent. Last week, we asked a senior executive at one of the firms about the African exit. He said he couldn't even remember that his firm even had an African fund.
The withdrawal had mainly to do with the firms’ inability to find African companies that would fit into their mega-funds. But we also think that since these big players can first of all manage buyout funds, they are not well-equipped to handle the issue of growth finance. And as we all know, growth finance is the norm in Africa.
There have also been cases where, as part of the exit, big private equity firms turned over the management of a standing fund. Roughly two years ago, four professionals – Eric Kump, Idris Mohammed, Genevieve Sangudi and Bruce Steen – left Carlyle’s Africa team to launch Alterra Capital. Carlyle then ceded management of its USD 600 million Carlyle Sub-Saharan Africa Fund to them and quit the continent.
The big funds’ withdrawal also has a positive aspect. In a less crowded market, African private equity firms are doing investments successfully. Spear Capital, a South African private equity firm where the majority of employees are African-native professionals, said last week it would enter FML Logistics, a Zimbabwean company that transports petroleum products in sub-Saharan Africa. Unfortunately, the value of the investment and other important details were not announced.
We do not want to fall into stupid Africanism, a kind of an Africa-will-do-best-alone patriotism. But it seems evident that a good knowledge of local conditions in the continent yields better results. Indeed, with respect to the ESG trend, we wonder whether a European or an American fund could actually invest in a Zimbabwean oil transport company.
Dar es Salaam, Tanzania’s business capital, has performed well in the Absa Africa Financial Markets Index 2021. Tanzania scored well on three accounts, including 1) access to foreign exchange; 2) macroeconomic opportunity; as well as 3) market transparency, tax and regulatory environment.
“The country cannot attain development if the financial market is not stable,” Lawrence Mafuru, Deputy Permanent Secretary in the Ministry of Finance and Planning, was quoted by the news site All Africa as saying. Mafuru spoke during the official launch of the index in Dar es Salaam last week.
Mafuru was joined by Nicodemus Mkama, CEO of the Tanzanian Capital Markets and Securities Authority (CMSA), who said: “At CMSA we are creating a conducive regulatory environment for the development of new products and services in capital markets including social impact equities and bonds, green bonds and blue bonds and ethical securities.”
Liquidity is often the weak point of African capital markets. But according to Mr Mkama market activity is improving. He noted that in twelve months that ended on 31 January 2022, there were 3.25 trillion transactions of equities and bonds – an increase of 22.6% from the previous twelve-month period.
According to the press release for the index’s rankings, South Africa, Mauritius and Nigeria maintained their lead as financial centres. However, their scores were somewhat lower than the previous year. Nigeria took the lead with regards to market transparency, tax and regulatory environment.
Shares in South African retail group Steinhoff International (ISIN: NL0011375019) are in violent ups and downs. On Wednesday, the day before Russia’s invasion of Ukraine, the stock was up 3.6% to ZAR 3.76 (EUR 0.22). On Thursday, the stock had shed 10.4% and gained 16.6% on Friday to ZAR 3.93 (EUR 0.23). For the past three months, Steinhoff’s stock has even appreciated 101.5%. But we are advising caution here.
Steinhoff remains a highly speculative stock. Taking the last four weeks as a measure, its share has lost 11.5% of its value. We also would point out that the economic environment is not supportive of retail companies. The inflationary pressures in Steinhoff’s main markets, namely the US and South Africa, remain high.
In addition, Steinhoff is struggling to reduce its high debt level. At the end of September 2021, net debt stood at EUR 10.3 billion - just 11% below the level a year before. This also compares with a debt level of EUR 9 billion in 2017. Given the situation on capital markets, we prefer companies that have low levels of debt and are hence less vulnerable to macroeconomic shocks.