Bears now stalk Africa’s markets

Published Feb 23, 2016


Johannesburg - Hopes are fading that Africa’s bond and equity markets will draw more than the most adventurous.

A toxic cocktail of plunging commodities prices, policy mismanagement and stubborn corruption have exposed investors like Mark Mobius for their excessive optimism. In 2012, when he declared that Africa “could be the emerging-market story of the next decade”, his Templeton Emerging Markets Group followed Neptune Investment Management and JPMorgan Chase & Company in setting up a fund dedicated to the continent.

“If you’d asked me 10 years ago, I would have expected significant growth across the capital markets, particularly with things such as initial public offerings and the deepening of bond markets,” said Joseph Rohm, who oversees $900 million of equities in 11 African countries for Cape Town-based Investec Asset Management. “That’s been the biggest disappointment.”

The combination of weaker currencies and falling asset values are hammering stock markets. Nigeria, the biggest economy, has seen the market capitalisation of its bourse halve in dollar terms since the end of 2013 to $41.9 billion, barely a 10th of Singapore’s level and half Colombia’s. The main gauge in South Africa, the continent’s biggest, has slid almost 30 percent in the US currency, while those in Ghana and Kenya have fallen 48 percent and nearly 15 percent, respectively.

Asset values are tumbling as governments struggle against widening budget- and current-account deficits. While sub-Saharan Africa was the most buoyant region in 2015, after emerging Asia, its growth dipped to 3.5 percent, the slowest pace since 2009, according to the International Monetary Fund. It’s suffering from plunging prices for raw materials such as oil, copper and coal, stemming from over-supply and waning demand from China.

Bear markets

“These are economies that have diversified very slowly,” said Razia Khan, head of African research at Standard Chartered in London. “So many decades later they’re reliant on commodities. It’s not the environment in which you’d expect deepening of markets.”

Five of the 14 largest sub-Saharan African equity indexes have declined more than 20 percent from previous bull-market highs, sending them into bear territory, while another six have slid more than 10 percent. The region’s dollar bonds are losing more money this year than the emerging-market average, and the currencies of Zambia, Malawi, Angola and South Africa rank among the world’s worst-performing over the past six months.

Investor retreat

Outflows have also soared as investors retreat in anticipation of interest-rate increases in the US. Foreign flows into Nigeria’s equity market fell 32 percent last year amid the weakening economy and investor exasperation over currency controls, which has driven the naira to a record low in the black market due to dollar shortages.

As their currencies drop, governments are finding it more expensive to service foreign debt, and yields have soared. Of the 17 sub-Saharan countries with dollar debt, 15 have seen yields rise above 8 percent. A year ago, only two had rates that high. Angola, Ghana and Zambia, whose yields have climbed to between 13 percent and 16 percent, no longer have access to the Eurobond market, according to London-based M&G Investments, which manages about $1.4 billion of emerging-market debt.

Deepening stock and bond trading, and luring foreign investors back, will be one way to ease economic pain, according to Khan.

“All governments are better served by liquid capital markets, which increase their funding options, especially at times of stress,” she said.

The chances of that happening this year are slim, John Ashbourne, an Africa economist in London at Capital Economics, said.

“People have been worried about currencies in the past couple of years,” he said. “I don’t think that will go away.”


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