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| Africa Research Survey 2012: Results index |
Ten years ago, Africa seemed like another planet for investors. This is all turning around,” says Samir Gadio, emerging markets strategist at Standard Bank based in London. In the past decade, the only market covered with any real enthusiasm in Africa was South Africa, where analysts focused on interpreting the macro and high-beta pictures. But investors are becoming more aware of sub-Saharan Africa as a viable investment destination and are demanding up-to-date and instructive details on the equity markets in the region. Businesses and research houses are recognizing the changing trend. International and local banks operating in the region will have relatively sophisticated research and investor relations departments, but smaller and less well established companies’ investor relations departments remain under-resourced and information is difficult to get.
Over the past five to seven years, the risk perception of Africa has changed dramatically for investors. Although the external environment will always affect company performance and investor interest, research houses highlight the fact that endogenous macro risks have generally become less of a concern than in the 1990s or 1980s.
Population growth, economic expansion, and structural and political changes have all advanced to the point that investors are beginning to select investments based on promising stocks and sectors. Moreover, the middle classes in sub-Saharan Africa are on the rise, generating attractive new opportunities for consumer goods companies such as food producers, beverage makers and tobacco companies, which tend to do well even when the overall performance of the stock markets is weak.
“We predict that Africa will be the next Asia,” says Olivier Vojetta, chief strategist and head of research at FM Capital Partners. “We wanted to position ourselves as one of the major Africa specialists.”
The research and training company has been in business for just two-and-a-half years and has $1.5 billion of assets under management. Although the London-based research house is fairly new to the game, it performed well in Euromoney’s survey of the best research houses in Africa in the banking and finance section.
The global financial crisis and the eurozone debt crisis hit the continent hard. South Africa, where 35% of finished goods are destined for Europe, was hit particularly badly. Volumes traded on emerging market stock exchanges have also suffered. Average foreign trading in the Nigerian stock market is claimed to have been $17 million last year – well below the 2008 peak of $100 million. But this is in line with global trends. Despite these woes, analysts are optimistic about the performance of African stocks. “Africa is one of the few places where you can still find yield,” says Vojetta.
SBG Securities, part of the Standard Bank Group, has also committed itself to detailed research efforts in Africa. SBG employs a team of 19 analysts in Johannesburg to cover southern Africa, seven analysts in Lagos covering west Africa and three in Nairobi covering east Africa. It also has a team of analysts in London researching complex and globally oriented sectors such as oil, gas, and metals and mining. “Because of the location of our teams, we are in a position to combine in-depth country knowledge with regional sector insights,” says Marc Ter Mors, head of equity research at Standard Bank Global Securities. The bank’s coverage seems to have paid off. Standard Bank took first place in the Euromoney poll for best overall research house in the economics section.
Ter Mors says that many more management teams and fund managers are attending his firm’s Africa-focused conferences in Lagos, London and New York. “We believe that this is a good indication that institutional investors’ interest in the sub-Saharan Africa region is increasing,” he explains. “We have even met South Africa-based asset managers looking to create Africa-dedicated investment funds.”
Traditionally, the information flow from sub-Saharan African countries and markets has been limited. When African Alliance first started providing information to investors in 1992 it had to create its own databases from scratch.
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| Randolph Oosthuizen, head of research at the investment banking group, African Alliance |
“We had to manually capture and update data to provide accessible information about these markets,” says Randolph Oosthuizen, head of research at the investment banking group, which provides local and on-the-ground investment banking services across the region. “Industry information was difficult to get and difficult to process; one never knew when corporates would announce their results,” he says. The hard work has paid off. In Euromoney’s poll, African Alliance took the top position in overall research in strategy, and performed the best in research areas including banking and finance, food, beverages and tobacco, and telecoms. Analysts agree that it’s difficult to tell what came first: interest in the market followed by demand for knowledge, or vice versa.
“Either way it’s a virtuous circle,” says Kojo Amoo-Gottfried, a research analyst at FM Capital Partners based in London.
Whatever the cause, markets in sub-Saharan Africa are becoming more sophisticated just as investors and clients are demanding more detailed information about the region. Luckily for research houses and international investors, companies in the region are improving investor relations.
Firms are beginning to communicate financials to the market in time and more frequently.
“Ten years ago, we did disclose less information than we do today,” says Matts Valela, financial director of Delta, a food, drink and tobacco company based in Zimbabwe. “The world has moved on and so have we. We are adapting with the times; when it comes to giving out correct and up-to-date information we are improving all the time.” In Euromoney’s poll, Delta performed the best in its category.
The same goes for Equity Bank. Investor relations have become a crucial part of its growth strategy, particularly when it comes to raising capital.
“Consequently, Equity Bank has developed a comprehensive strategy and expert investor relations team to engage investors, comprising the CEO, CFO, director of strategy and company secretary, director of treasury and a leading member of the credit team,” says Alex Muhia, head of communications at Equity Bank based in Kenya, which came top of the poll in the banking and finance category. News wires such as Bloomberg and Reuters have increased their coverage of these smaller markets.
“Companies in sub-Saharan Africa have been developing investor relations teams for the last four to five years,” says Amoo-Gottfried. “This is influenced by the growth of the market as much as company policy. But on the whole, companies are moving in the right direction.”
Companies take sell-side research seriously. “We have over 40 sell-side analysts covering our company and we welcome their interest and the insight they bring for investors,” explains George Cazenove, head of media relations at Tullow Oil, the company that topped Euromoney’s poll in the oil, gas, chemicals and petrochemicals category.
It would be wrong though to put all sub-Saharan Africa countries in the same category. There are big variations in how active financial markets in the region are. “Some of them are a bit old school and struggle through bureaucratic management; specific individuals can directly influence how the stock market is run; and some are naturally more motivated than others,” says Oosthuizen.
Size is the biggest influence on how active a market is and how much information is transmitted. In smaller countries, such as Malawi or Uganda, the size of a company and the variety of industry sectors are usually limited by the size of the economy. Listed companies will tend to be smaller and sectors fewer than they would be in larger countries such as Kenya and Nigeria. Despite investors turning to potential high-earning sectors rather than just focusing on the macro stability of a specific country, financial markets will be better developed in large countries because they can more easily achieve scale.
Kenya and Nigeria have some of the greatest potential in the region. Kenya, which is not rich in resources, has been forced to innovate in the past and now has an established manufacturing industry. As a result, “Kenya is in a better position to innovate and grow compared with Nigeria, which has traditionally been more reliant on oil revenues,” says Oosthuizen. “It is only in recent years that import-replacing capacity has been developed in Nigerian industries such as cement.”
For Nigeria, the effects of the financial crisis on the country forced investors to diversify. Before the crisis hit, banks did not focus on opportunities in the real economy, explains Gadio. “Sizeable loans were extended to financial intermediaries to purchase their own shares in the oil sector, so when the speculative bubble burst in 2008 and oil-related non-performing loans rose, some banks became virtually bankrupted.”
Nigeria’s central bank took control of the situation, but the stock market hasn’t recovered to its pre-crisis level. Before the crisis, global investors in Nigeria were targeting financials, which accounted for up to 60% of market capitalization in the relatively undiversified market. “Once the crisis hit, financials lost value. Now investors are more willing to diversify,” says Gadio.
This is not to say that smaller countries have no prospects. Tullow Oil listed in Ghana last year and the recent listing of Bank of Kigali in Rwanda has helped liquidity there. “There are also continued inflows into the short-dated part of many sub-Saharan African sovereign curves as investors chase yield. For example there were significant inflows to Ugandan T-bills last year,” says Babatunde A Ogunleye, a research analyst at FM Capital partners based in London.
For smaller companies in smaller economies research is still a relatively new phenomenon. “Research may not be completely integrated within their business model, but this is changing fast,” explains Gadio. Africa is no longer another planet.
