Foreigners go for African shares

Equity investment in many African stock markets in the early weeks of this year has been dominated by foreigners, according to pan-African asset manager and investment bank Imara.

It said long-term value opportunities had attracted strong foreign interest in African equities - in contrast to the investor flight from the continent seen in the immediate wake of the international financial crisis of 2008-09.

"It's clear from volume and trading data, certainly in Nigeria, Kenya and Zimbabwe, at least, that foreign investors continue to dominate, leaving domestic participants to watch from the sidelines," said John Legat, manager of the Imara African Opportunities Fund.

"Anecdotally, we know that frontier market funds are raising and taking new capital that needs a home. In addition, South African pension funds and institutions are stepping up their weightings towards sub-Saharan Africa."

Simultaneously, a lack of selling has resulted in some sharp rises in certain equities. This now makes it difficult to argue that markets such as Kenya and Nigeria (except for their banks) are still cheap. "Growth investors can and do argue that valuations for growth stocks in fast-growing economies in Africa, such as Nigeria, can easily sustain high valuations as compared with, say, a discounted cash flow model that puts too much emphasis on the next five years rather than the next 20," said Legat. "Certainly, Diageo's recent management comments on their spirits business in Africa give great confidence for future growth opportunities."

Zimbabwe valuations remain cheap versus its regional peers - "no doubt due to the risk premium attached to past political and policy uncertainty".

However, firmer market valuations are also possible in the Zimbabwean market.

"If that risk premium falls now that a referendum on an agreed constitution is imminent and EU sanctions are removed altogether after that referendum, then equities should rise by considerably more," said Legat.

Foreign interest is concentrated on the larger African markets. Small markets in sub-Saharan Africa have been largely ignored by international investors, although valuations are attractive and high yields can be achieved.