Africa: Sub-Saharan markets lose their glitter


Dominic O’Neill
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Barely a day goes by without a new craze for so-called frontier markets in Africa being mentioned somewhere. But are the returns worth the fuss?

As a whole, stock markets in sub-Saharan Africa outside South Africa have lost slightly less than the 13% the S&P 500 lost in the first eight months of 2008. But even this year markets that are more developed might have made a better investment given that it is so much easier to get money out of them.

The Johannesburg Stock Exchange, for example, which is more than five times the size of all other sub-Saharan African stock exchanges combined, has fallen around 11% this year, compared with a fall of about 10% in the rest of the sub-Saharan African stock markets combined.

The many new frontier or Africa funds created in the past two years have had problems deploying all of their money because of the difficulty of investing in stock markets in sub-Saharan Africa. But as Christopher Hartland-Peel, African equities analyst at London frontier markets specialists Exotix, jokes: "The decline of share prices across the continent’s markets may have probably made investors quite happy about this."

Frontier markets in Africa have fallen less than expected over the past year, partly because they are relatively isolated from the rest of the world. Global malaise might catch up with them next year. But even this year the biggest African frontier markets have seen a three-year or even five-year bull run start to turn.

"It has been hard to find anything in Africa that didn’t go down this year," says Gabor Sitanyi, portfolio adviser at an Africa-only fund run by Charlemagne Capital in London.

Nigeria, in particular, accounting for more than half the combined worth of stock markets in sub-Saharan Africa outside South Africa, has experienced such a harsh share price fall that its government is apparently considering setting up a stabilization fund to prop up the market. The market is down by a third since March, and by about a quarter since the beginning of the year.

Kenya, the second-biggest market, has fallen victim to investors that flipped stocks issued by the government for mobile-phone company Safaricom. The market is down about 10% since the beginning of the year.

Throughout the continent, fears that the commodity cycle was turning caused a particularly sharp downfall in July and August. What happens next to commodities will also determine what happens to non-commodity stocks, such as banks in oil-rich Nigeria, which make up about 60% of the country’s market.

But the burst of new funds of global investors focusing on Africa has already slowed to a dribble. Sitanyi says there have been few new investments in his Africa fund this year. As Hartland-Peel points out, when investors are afraid of the S&P 500, it is difficult to persuade them to take a punt on frontier markets.