Macroeconomic data are currently moving financial markets, including those in Africa. There is, however, one big difference: While negative data like high inflation and expected negative growth are driving Wall Street and European markets down, African markets are holding up fairly well. The S&P 500 index has fallen 25% since January and the Dow Jones index nearly 20%. In Europe, the Euro Stoxx 50 index is off 22% since January.
The picture in Africa is somewhat better. In Lagos, for example, the blue chip index for the Nigerian Stock Exchange index, the NSE 30, has lost a mere 2% since January. Meanwhile, in Casablanca, the Moroccan All Share index (MASI) has lost 15% and in Cairo the EGX 30 index 18.7%. But in Abidjan the BRVM 10 index has gained 2%.
The main reason for this decoupling is that in Africa, the economic outlook remains positive. While growth rates in the west are slowing significantly, Africa’s prospects look rather good. In 2022, the International Monetary Fund (IMF) projects sees growth of 1.6% for the US and 3.1% for the euro area. Growth in sub-Saharan Africa should be 3.6%. In 2023, the IMF expects just 1% growth for the US and 0.5% for the euro area. Furthermore, both the German and Italian economies should shrink by 0.3% and 0.2%, respectively, next year. Growth in sub-Saharan Africa should, by contrast, equal 3.7%, the IMF expects.
As we often complain, the World Bank and the IMF still cut the African continent in two. They combine northern Africa with the Middle East and thereby separate it from sub-Saharan Africa. For this region, the IMF sees the growth rate this year at 5% thanks in large part to high oil prices. That growth should fall to 3.6% in 2023, according to the IMF.
Given the data, we feel that a cyclical risk premium for Africa unjustified. The data shows that in 2023, growth on the continent should be above the world average.
How much risk would you accept regarding African banking shares? Do you trust the IMF’s assessment of the sector or do you follow other African investors?
Let us explain: The IMF warned last week that financial stability risks were rising in frontier markets like Africa. In a report, it said: “With conditions worsening in recent weeks, key gauges of systemic risk have risen. There is a risk of a disorderly tightening in financial conditions that may interact with pre-existing vulnerabilities.”
The IMF added: “Emerging and frontier market bond issuance in US dollars and other major currencies has slowed to the weakest pace since 2015. Without improved access to foreign funding, many frontier market issuers will have to seek alternative sources and/or debt reprofiling and restructurings.”
Since January, banks have been among the top performers on African equity markets. Jaiz Bank (ISIN: NGJAIZBANK05) on the Nigerian Exchange (NGX) in Lagos is up 59%,; Wema Bank (ISIN: NGWEMABANK07), also listed in Lagos, has gained 53%; and BH Bank (ISIN: TN0001900604) shares, traded in Tunis, have put on 54%.
The impressive gains have not just been limited to small cap banks like Jaiz (EUR 72 million) and Wema Bank (EUR 99 million). Blue-chip banks like Ecobank (market cap: EUR 640 million) and South Africa’s Absa Group (market cap: EUR 8.3 billion) are also thriving. Ecobank Transnational (SIN: TG0000000132) has put on 28% since January, and Absa Group (ISIN: ZAE000255915) is up 17%.
In assessing African banking stocks, it is important to consider that the IMF is looking forward, while the list we have provided is backward-looking. African bank shares have been benefiting from the fact that Africa’s economy has grown faster than that of developed countries. But we feel that investors should take the IMF’s concerns seriously. For African banks may also suffer from possible future instability in the global financial system.
It’s simply not the case that western investors have given up on African start-ups. While the IMF has recorded capital outflows from frontier markets like Africa, there are still western investors active on the continent. One prominent example is Serena Ventures, a vehicle set up by US tennis star Serena Williams.
Williams’ venture capital fund is part of an investor consortium financing Nigerian data and intelligence start-up Stears Business to the tune of USD 3.3 million. The brings the total funding for Stears to USD 4 million. Stears reportedly aims to build a database for African economies and markets and produce “deep, reliable, regular streams of data” in the effort.
Serena Williams was also quoted in the news report as saying that she invested in Stears, “because it has strategically thought of how to increase the investment community on the continent.”
When it comes to implementation of ESG criteria among portfolio companies, US and African are taking the same approach. This is reflected by a new survey from the research firm Pitchbook. According to Pitchbook, 58% of US investors do not require their investment targets to measure and report on material ESG factors. A similar proportion of investors in Africa and the Middle East also waive the requirement. Meanwhile in Europe, investors mostly want investees to measure and report on material ESG factors. Only 34% of those investors waived the requirement, the survey showed. Also, the number of investors de-emphasising ESG reporting was just slightly higher in Asia and in Latin America – namely at 39%.
Generally speaking, ESG is gaining importance as an investment trend. But Pitchbook also noted that opposition to the movement was growing. “In 2020, just one person felt the need to register extremely negative views on the topic. This year, there were roughly 50 who did so,” said Hilary Wiek, Pitchbook’s lead analyst for fund strategies & sustainable investing.