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Africa stands tall.

To everyone's surprise, Africa's tiny stockmarkets not only avoided the tumult that gripped more developed markets last year but actually outperformed many of them. But there is still a long way to go.

In times of sluggish corporate earnings, record low bond yields in major OECD markets and huge Forex losses in Russia and South-East Asia, international fund managers are seeking more profitable investment channels. There is in fact an emerging region which enjoyed real GDP growth of 3.5% in 1998, falling inflation and fiscal deficits in most countries and cheap valuations allowing for positive USS returns. In short, a dream market for investors who sustained heavy losses in major developed and emerging markets.

Surprisingly, this favourable investment-profile belongs to the fledgling stock markets of Africa, which are still largely undiscovered by institutional investors. Defying global financial volatility and weak world-wide share prices in 1998, some African markets bucked the trend and retained positive growth figures. Despite downside corrections among strong performers like Ghana, Botswana and Mauritius since the second half, profit-taking has meant that Africa, in effect, outperformed other regions.

While the Morgan Stanley Capital International emerging markets index plunged 24% towards the end of 1998, Standard Bank reports that sub-Saharan bourses, excluding the JSE, declined 14%. Foreign portfolio investment rose, albeit modestly, in 1998, attracted by a new regional market, the Bourse des Valeurs Regionales Mobilieres (BRVM), based in Abidjan.

In Ghana, sound economic fundamentals, the cedi's stability and declining yields on treasury bills underpined the Accra bourse. Botswana managed to sustained its impressive 1997 rally and analysts see commercial banks and the Sechaba Brewery as attractive stocks. But the market is vulnerable to weaker diamond prices and sales which will lead to a growth slowdown in 1999. Cote d'Ivoire is seen as a future growth market, underpined by the CFA franc's peg to the euro, with solid medium-term growth. However, the performances of leading bourses fell far short of their potential.

A plunge in the Zimbabwean SE industrial index in 1998 reflects low business confidence amidst political-economic uncertainty and the tumbling of the Z$ to new lows of 38:$1. Higher yields on T-bills also reduced the markets attractiveness, while earnings were dented by a weak GDP growth of below 2% and spiralling import-costs due to steep devaluation. The ZSE may stage a recovery, assuming gradual relaxation of tight monetary policy and the IMF support, expected in 1999. Nigeria, after a bear run in 1997/98, offers growth potential in 1999/2000, but only if political stability leads to greater foreign investment.

Most attractive valuations

However in Kenya, a growth slowdown to 1.5% in 1998, a lack of liquidity, a banking crisis and poor relations with the IMF due to concerns over government ethics - hit the Nairobi SE index. Despite short-term problems, the NSE offers some of the lowest and most attractive valuations in Africa. Falling interest rates will reduce liquidity and encourage diversion into equities.

The JSE should get an uplift from general stability in global markets this year, a falling interest rate cycle and corporate restructuring. Analysts say earnings growth momentum may recover by 2000. Therefore, fixed-income assets (bonds/cash) may outperform equities which are vulnerable to profit-downgrades in 1999. The rand still carries a downside-risk, due to ongoing weakness in commodity prices and a decline in capital inflows. Amalgamated Banks South Africa projects an average rate of R6.3:$1 in 1999, compared with R5.6 in 1998.

In emerging Africa, bargains are plentiful as valuations remain attractive relative to earnings and growth potentials of most stocks. Africa is the cheapest emerging market region, hence there is good scope for long-term investors. Forward price:earnings ratios of Sub Saharan African bourses average below 10, compared with 18-25 in Europe and the US. Quality stocks as subsidiaries of MNCs like Unilever, Brooke Bond, Nestle, Standard Chartered, Barclays Bank, or prominent local names such as Ashanti Goldfields, Delta Corp and top-tier bank stocks in Nigeria, Mauritius, Kenya and Ghana are listed on the exchanges. They are profitable, pay dividends and have strong cashflows. Governments in the region are fast embracing privatisation which will lead to new listings this year and next.

The outlook for prime stocks is bullish. A combination of higher GDP/earnings per share growth, lower interest rates and corporate restructuring should improve the quality of earnings. This will allow for higher valuations in the medium-to-long term, thereby overcoming a legacy of poor governance, which has undermined valuations of most markets. The main risk for foreign investors is the possibility of a steep devaluation, as with Zimbabwean dollar or Zambian kwacha in 1998.
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Title Annotation:stockmarket's positive growth figures; View from the City
Author:Siddiqi, Moin
Publication:African Business
Date:Feb 1, 1999
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