Africa's Frontier Markets Are Cheap Again

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Includes: AFK, EMFM, FM, FRN
by: Helmut Reisen

Africa's equity portfolio flows have experienced consistent volatility during the past two decades. From a net equity outflow recorded for 2009, they jumped to a massive net inflow in 2010 of almost USD 20 billion. Since then, they have leveled off to a mere USD 1.2 billion recorded for 2015. Volatile portfolio equity flows were reflected in most African equity market indices that produced negative returns amid a challenging economic environment. While many observers see the beginning of the US Fed's policy tightening cycle as the culprit for the recent retrenchment, domestic factors also seem to have contributed to reduced investor appetite for EME assets. A slowdown in growth added to investor concerns, particularly against the backdrop of the commodity price slump.

Figure 1: MSCI Emerging Frontier Markets Africa ex-South Africa Index vs. MSCI World

Figure 1 compares the MSCI Emerging Frontier Markets Africa ex-South Africa Index (blue line) with the MSCI World Index (green). It covers six countries (Egypt, Kenya, Mauritius, Morocco, Nigeria and Tunisia), with 38 constituents. The three largest, by index weight, are Egypt's Commercial International Bank (OTCQX:CIBEY), Maroc Telecom (OTCPK:MAOTF) and Nigerian Breweries. No industrial exporter figures among the ten top constituents, reflecting Africa's industrial weakness.

Figure 1 shows that Africa's frontier markets held up well until early 2015 compared to advanced stock markets. Actually, African stock markets performed better than the emerging markets benchmark index (MSCI EM) in 2015. The Bourse Regionale des Valeurs Mobiliers (BRVM), the regional stock exchange for the West African Economic and Monetary Union member countries, achieved strong positive returns on the back of stronger economic performance in Côte d'Ivoire. East Africa's stocks did pretty well, as did their underlying economies. Commodity dependent Africa, by contrast, is exemplified by Nigeria where uncertainty related to the presidential elections' outcome and lower oil price contributed to lower returns.

From Spring 2015 to January 2016, however, the MSCI Emerging Frontier Markets Africa ex-South Africa Index has almost halved. With a dividend yield of 4.6% and a P/E ratio of 9.5, the index seems cheap now compared to the MSCI EMF index (3% dividend yield; 12.6 P/E ratio). In February 2016, the index started a forceful countertrend rally of 20%, and perhaps even more: a turnaround.