African stocks look set to break a four-year winning run in 2015 with faltering currencies in markets such as Ghana, Nigeria and Zambia adding to the pain for foreign investors.
The MSCI Africa index was among the world’s best performers over the last five years as investors bought into the ‘Africa Rising’ story of an increasingly prosperous middle class.
But the index, which excludes South Africa and includes three North African markets, is on track to end the year about 20 percent lower, a decline that would mark its weakest yearly showing in four years. The index is also lagging behind a 7 percent fall in global shares.
Although some shares are giving stock pickers the cheapest entry point to Africa in several years, weakening currencies add to the complications for foreign investors.
“When you look at the performance so far this year, it’s pretty much in line with global equities but the pain almost doubles in dollar terms,” said Ronak Gadhia, equity analyst at London-based frontier markets investment bank Exotix.
Nigeria’s All-Share index is down about 15 percent so far this year in local currency terms. But add in the weakening naira currency, and the index has dropped more than 23 percent.
In Kenya, a 7 percent stocks fall this year becomes a 22 percent slide when currency is factored in.
“Probably no African frontier market will recover enough to wipe out losses by the end of this year. Individual stocks might but markets as a whole will not,” said Godfrey Mwanza, head of Pan-Africa Listed Equities fund at Barclays Africa’s asset management arm in Johannesburg.
“This market better suits stock pickers. There are many quality stocks that offer great long-term value at the moment and patient investors will be rewarded.”
For example, Nigeria’s United Bank for Africa is trading at about 2 times its forward earnings, compared with nearly 15 times for Bank of the Philippine Islands.
Africa boasts strong fundamentals. Its population is expected to double to 2 billion by 2050, and it is benefiting from a decade of relative political stability and rising disposable incomes.
But the immediate pressure on currencies makes it harder to sell that long-term story to investors, said Sven Richter, who runs a sub-Saharan equity fund at RenAsset Management, a unit of Renaissance Capital.
“When you look at valuation metrics like price to book and price to earnings, most of these stocks are very cheap: there’s a compelling case for investors to get into Africa,” Richter said.
“We are looking at returns of about 15 to 20 percent over the next five years when you buy at these levels, but everyone is nervous.”
The Kenyan shilling has dropped by about 16 percentthis year, hit by a rising current account deficit and depleted tourism inflows after attacks by Somalia’s al Shabaab insurgents.
Tumbling commodity prices such as oil and copper have sent investors in Nigeria’s naira and Zambia’s kwacha on a selling frenzy.