Analysts and financial journalists like to pretend that there is only one opinion on the state of financial markets. A comparison of large equity funds that invest in Africa shows that this is not the case. Indeed, each of the fund managers takes a different approach to African equities.
One the one hand, some managers prefer stocks traded on the Johannesburg Stock Exchange (JSE). Pandora Omaset and Oleg Biryulyov, managers of the JP Morgan Africa Equity Fund, have 46% of assets allocated to South African stocks. This is eleven points above the weighting of all South African stocks in the benchmark index. The same is true for Sebastian Kahlfeld, manager of the DWS Invest Africa fund, who has invested 45% of that fund’s assets to stocks on the JSE.
On the other hand, Peter Leger and Gregory Longe of Cape Town-based Coronation Fund Managers, cannot be accused of suffering from home bias. Their Africa Strategy Fund invests 58% of assets in Zimbabwe and Egypt, while only 2.8% is invested in South Africa.
What all these African fund managers have in common is significant exposure to the financial sector. That said, they differ greatly regarding other sectors. DWS fund manager Kahlfeld has large positions in telecom companies such as MTN and Airtel. JP Morgan is invested in mining firms like First Quantum Minerals, Ivanhoe Mines, Gold Fields and B2Gold. Coronation’s Peter Leger, meanwhile, has large positions in consumer goods stocks.
So which strategy has panned out? Since the beginning of the year, the DWS fund is down 9.8%, Coronation’s Africa Strategy down 3.2%, while JP Morgan’s fund has gained 3.2%. In the past five years, however, Coronation’s fund comes out on top with an annualised return of 7.7%. JP Morgan’s fund is in second place with a yearly return of 2.6% and the DWS fund in third with a mere 0.3%.
Investors should be aware though that Coronation’s fund has 30.5% of assets in Zimbabwe. That is a daring bet given the uncertain economic situation in that country.
As the Covid-19 pandemic subsides, some African tourism stocks are gaining momentum. For example, Moroccan hotel operator Risma (ISIN: MA0000011462) has jumped 16.4% to MAD 127.70 (EUR 12.90) since January. This is despite an operational loss, as measured by EBIT, of MAD 92 million (EUR 8.7 million) for 2021. Indeed, Risma's shares are even doing better than those of their international competitors. Marriott (ISIN: US5719032022) is down 0.8% to USD 163.85 since the beginning of the year, while Hilton Worldwide (ISIN: US43300A2033) has shed 14.5% to USD 133.31 and Hyatt (ISIN: US4485791028) 16.8% to USD 79.79.
Risma’s gain comes amid a rebound in African tourism. According to the World Tourism Organisation, international arrivals in Africa were up 51% in January 2022 compared with January 2021. This is a good sign, even if tourism to Africa is still far from pre-crisis levels. Arrivals were, notably, down 69% compared with January 2019.
The JSE is particularly rich in hotel stocks with the special feature that the listed hotels are often linked to casinos. These, however, are lagging behind Risma. City Lodge Hotels (ISIN: ZAE000117792), for example, is down 22.4% to ZAR 4200 (EUR 246.14) since January. Sun International (ISIN: ZAE000097580) has lost 10.4.% to ZAR 25.50 (EUR 1.49). Tsogo Sun, meanwhile, has split its activities between a listed casino company and a listed hotel company. Their performance: Tsogo Sun Hotels (ISIN: ZAE000272522) is down 8.5% to ZAR 3220 (EUR 188.71) this year and Tsogo Sun Gaming (ISIN: ZAE000273116) 3.9% to ZAR 11.20 (EUR 0.66).
It seems that leisure hotels are currently the better bet. This is specifically true for Mauritius. There, New Mauritius Hotels (ISIN: MU0036N00007) has gained 31% this year to MUR 9.30 (EUR 0.21), and Sun Limited (ISIN: MU0016N00009), the market leader on the island, 63.2% to MUR 31 (EUR 0.69).
Capitec Bank Holdings (ISIN: ZAE000035861) was recently one of the hottest stocks on the JSE. In the past five years, Capitec’s share price skyrocketed, gaining 171.1% to ZAR 2087.42 (EUR 124.56). This year, however, the share has lost momentum, gaining a mere 2.3% since January.
You may say that given the bearish market of late, any price rise is good news. As far as Capitec is concerned, analysts see more modest gains going forward. They rate the share as a “hold” and believe it has an average upward potential of just 1.2%. This is quite disappointing if you consider that Capitec is more like a fintech or digital bank than a traditional bank.
But one German investor is still singing Capitec’s praises: Frankfurt-based asset manager Digital Leaders Fund (DLF), which runs nearly EUR 100 million in three funds. In a recent commentary on Capitec’s valuation, the DLF says: “The commercial bank has considerable potential because significant synergies can be leveraged thanks to the data comparison with the retail bank.” It adds: “The Capitec share remains in the EM Digital Leaders portfolio, even if it now has to grow back into the valuation.”
The Stock Exchange of Mauritius (SEM) is modernising its trading system. On Friday, the exchange launched a new high-end Automated Trading System (ATS) and a fully-responsive mySEM app offering new functionality. The SEM says that with these innovations, it aims to secure its position as “an attractive multi-currency capital-raising and listing platform for local, Africa-focused and niche international products.”
The competition among financial centres in Africa has recently intensified. For many years, Mauritius was the leading centre for funds, banks and corporates doing business on the continent. To defend that position, Mauritius has entered investment protection agreements with nearly all African countries. However, other financial centres in Africa are catching up. Morocco, for example, has successfully launched the Casablanca Financial City (CFC) initiative. CFC aims to offer advantages to those who want to invest throughout Africa from a location in Morocco.
The SEM exchange is host to numerous African stocks, but as the local markets develop companies are looking beyond Mauritius to reach international investors. We welcome the new competition, as it will help strengthen African financial markets as a whole.