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Which African stocks do fund managers want?

A handful of African stocks figure among the favourites of international fund managers. This week, we uncover what those stocks are. Be prepared to be surprised by this or that choice.

Capital News Africa: From the Trading Floor – Week 23-2022

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There are hardly any continents about which investors are in disagreement. Take Wall Street for example: If investors bet on blue chips there, then they all typically buy so-called GAMMA shares (Google, Apple, Meta, Microsoft, Amazon). It seems that on Wall Street, a herd mentality prevails. In Africa, however, a consensus does not exist among investors about what shares to buy to fully profit from the continent’s stock markets.

To find out what shares Africa-focussed funds are buying, we examined their portfolios and made some surprising discoveries. The first is that the fund managers are not choosing stocks according to market cap.

Big market caps dominated by South African stocks

Here is the list of the biggest shares in Africa according to market cap: First place is held by South African technology and media firm Naspers (ISIN: ZAE000015889), which is valued at EUR 41.2 billion. Naspers is followed by seven more South African companies: The mining firm Anglo American Platinum (ISIN: ZAE000013181); the bank Firstrand (ISIN: ZAE000066304); the telecoms group MTN (ISIN: ZAE000042164); the oil firm Sasol (ISIN: ZAE000006896); the banks Standard Bank (ISIN: ZAE000109815) and Capitec Bank (ISIN: ZAE000035861); and finally the UK-based telecoms firm Vodafone (ISIN: GB00BH4HKS39), which has a big presence in South Africa.

Occupying the ninth spot is the first company from Nigeria, namely the MTN subsidiary for that country (ISIN: NGMTNN000002). Number ten is Kumba Iron Ore (ISIN: ZAE000085346) from South Africa, and number eleven is Dangote Cement from Nigeria (ISIN: NGDANGCEM008). Morocco’s Itissalat, also known as Maroc Télécom (ISIN: MA0000011488) rounds out the list at number 12.

Canadian mining firm instead of an African blue-chip

As mentioned, fund managers are not paying much attention to this ranking. Consider the Africa Equity Fund (ISIN: LU0355584466) from JP Morgan Asset Management. Its single-biggest holding is First Quantum Minerals (ISIN: CA3359341052), which makes up 8.9% of the fund. First Quantum is a Canadian mining company that extracts copper, nickel, gold, silver and zinc in Zambia and Mauritania as well as in other parts of the world. Its market cap currently totals EUR 17.5 billion.

The JP Morgan Fund also holds three stocks from our list of the biggest based on market cap. They are: Firstrand, MTN and Capitec Bank. But then again, the fund has invested 3.9% of its assets in a firm that does not belong to the list: Kenyan telecoms operator Safaricom (ISIN: KE1000001402). That said, Safaricom is a true heavyweight on Nairobi’s stock exchange with a market cap of EUR 8.6 billion. That sum equals around two-thirds of the exchange’s total market cap.

DWS bets heavily on MTN

Sebastian Kahlfeld, manager of the DWS Invest Africa fund, also has a big investment in MTN - the South African telecoms group makes up 8.9% of the fund. Indeed, the holding is just short of the 10% limit for any one stock. Kahlfeld also has significant investments in Standard Bank, Capitec Bank and Naspers, which makes up 3.3% of fund assets. Other notable holdings include Moroccan supermarket chain Label Vie (ISIN: MA0000011801); Egyptian investment bank EFG Hermes (ISIN: EGS69101C011); and Centamin Egypt (ISIN: EGS69101C011), a British mining group that mostly extracts gold in Egypt.

We would have liked to name the stocks Peter Leger, Head of Africa Strategies at South African fund manager Coronation, invests in. Coronation, however, is not very transparent on this point. Still, Leger does mention that he has 30% of the assets from the fund he manages in Zimbabwe.

A chance for active fund management

A lot more transparent is Mont Lake with its Drakens Africa ex S.A. Ucits Fund. The fund is not invested in South Africa and hence not in stocks with the biggest market cap on the African continent. Drakens Africa also avoids Nigerian blue chips and instead has invested heavily in Safaricom, Morocco’s Attijariwafa Bank (ISIN: MA0000012445) and Kenyan bank KCB Group (ISIN: KE0000000315).

All of this reflects that African equity fund managers follow their own strategy and have their own focus. This contrasts with the situation in the US and Europe, where asset managers are often accused of just buying the same blue-chips. This is clearly not the case for Africa and underscores how useful actively managed funds can be.