Analysis: Less-fancied African stocks get attention from investors

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Harare - South African and international investors are slowly tapping into previously shunned “less obvious” stocks across sub-Saharan African markets, says Imara Africa Securities, as most international companies increasingly focus their strategies on regional markets.

Africa is seen as the next big frontier for investors seeking growth opportunities and value returns from stocks focused mostly on consumer markets. This is expected to ride on the fast-developing continent’s booming population, which is expected to reach 2.4 billion by about 2050.

Despite its expected population boom and potential for high yields on investments, Africa – plagued by conflict, wars and hunger – has continued to lag behind in attracting investments.

Investors have largely been attracted to the blue-chip and growth-driven stocks while the small and medium caps, and less popular stocks, have largely been ignored, experts say.

“Africa is liquidity challenged. This means relatively few stocks are traded in sufficiently high quantities to attract the attention of asset managers with major funds to invest,” Andrew Schultz, the Cape Town-based head of strategy for Imara Africa Securities, says.

As a result of this, “the big players tend to focus on larger markets, notably Nigeria and Kenya, that have several very tradable stocks on offer”, while in contrast other markets such as “Zimbabwe may have only two or three liquid stocks while Senegal may have only one”.

This leaves the bulk of the counters in such countries mostly traded by local and small-tier international investors. The local investors are battling liquidity.

But this sentiment is now changing, with risk-averse and growth-seeking investors from South Africa and the international scene enhancing their focus on these counters.

There has been growing interest in markets such as Zimbabwe and Senegal.

Traditionally, investors have been attracted to popular stocks such as Econet and Delta Corporation in Zimbabwe, but there is growing realisation that other stocks, such as regional seed producer Seedco and food and retail franchisor Innscor Africa (both listed in Zimbabwe) may also offer valuable returns on investment.

Fund managers who attended a recent investment conference in Zimbabwe said last week that the investment flow had started to follow destinations where there was greater clarity and potential for high yields.

“Some valuations are beginning to look stretched. As a consequence, investors are beginning to seek out less obvious, but significant value opportunities in some other markets and in less frequently traded stocks.”

Experts say investors focused on Africa are moving away from the traditional resources haven of the continent and moving into consumer-driven portfolios.

The recent African Economic Outlook report by the African Development Bank, the UN and the Organisation for Economic Co-operation and Development says: “Africa’s medium-term growth prospects have improved, on the back of broader political and social stability at home and recovering economic conditions abroad.”

It further highlights, however, that “important challenges remain”. The challenges range from instability and unfriendly regulatory frameworks, which need to be improved to further attract foreign direct investments.

“If the current pace of growth is sustained, foreign direct investment and portfolio investment could soon constitute Africa’s main source of financial flows,” the report says.

However, Schultz says corporate earnings in some markets still heavily depend on “consumer purchasing” power. He says for markets such as Zimbabwe, consumers are currently under pressure.

Despite this, “significant returns are possible. For instance, Delta’s two-year annualised return, with dividends reinvested”, is 35 percent.

“Less studied markets are now the focus area of some highly sophisticated investors.

“We see this trend across investment houses in Cape Town and Johannesburg and in the northern hemisphere, especially on the east coast of the US, the UK and western Europe,” he notes.


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