Almost 7 years after the financial crisis the African stock markets are back at their crisis levels. Since July 2014 the value of the Dow Jones Africa Titans 50 Index, the index investing in the 50 largest African companies, has nearly halved. One might wonder whether now is the right time to jump into the African frontier market again. To answer that question we'll take a look at the fundamentals of the African markets.
The African continent contains the most raw materials in the world. It is therefore no surprise that African economies are strongly dependent on the mining and exporting of these materials. All African countries, except for a few, even have a commodity as their most important export product. Moreover, these countries' exports is badly diversified. For example, iron ore amounts to 40% of total export of Mauritania and more than 94% of total exports of Angola is oil. These export numbers are also an indication of the African problem. If commodity prices rise, the African economies will flourish, if the opposite occurs, African economies are in trouble. So what's troubling? Commodity prices have been declining recently. Gold prices keep on falling and recent rate hike probabilities by the FED are likely to push the gold prices down further. The oil price also remains sluggish between 40-60 dollar a barrel. Moreover, the International Energy Agency prognoses 80 dollars a barrel, but only in 2020, thus recovery of the oil price seems far away.
Falling commodity prices are not the only reason why the African malaise is not over yet; this is where China joins in. African economies expose themselves heavily to China. For example, Zimbabwe, Zambia and Congo export respectively 33%, 43% and 53% of their total export to China. The cooling down of the Chinese economy, and with it the falling Chinese demand for resources, raw materials and other commodities, is thus creating major problems for the African export.
Low prices and bad prospects for commodities, combined with a fall in demand from China means that Africa will keep on facing headwinds for a while. The goldmine that is Africa is clearly showing cracks in the tunnels, but is close to collapsing further.