BATANAI MATSIKA
A recent analysis by Tellimer Research shows that there are currently more attractive entry points in Frontier Markets (FM) and Emerging Markets (EM) when compared to Developed Markets (DM).
The analysis makes use of the Buffet Indicator, which is basically the ratio between stock market capitalisation and GDP.
This metric is a gauge of market valuation and shows that EM and FM are well behind DM.
Some of the reasons that explain valuation gaps include the varying levels of privatisation, multinational presence and private equity activity.
That said, it appears that EM and FM exhibit attractive investment propositions, particularly for those with longer time frames and tolerance for lower liquidity.
The Africa frontier equity market space has largely been dominated by institutional investors with very minimal participation from retail investors.
Over the past 10 years or so, we have witnessed the emergence of Africa-focused Funds across the globe – set up to achieve long-term capital growth by investing in African equities.
The appetite for African equities largely rose on the back of prospects of good returns and a means to diversify risk.
In recent years, countries in SSA ex SA (including Zimbabwe) exhibited high GDP growth signals coupled with bottom-heavy demographic profiles, implying sustained demand growth.
Retail investors can however participate in African frontier equity markets through various platforms and strategies.
Below are some of the methods or strategies that retail investors can use to participate and gain exposure in African Frontier Equity markets;
– Africa Frontier Market Investment Platforms – A number of Africa-focused stock broking firms have set up investment platforms that allow for retail investors to buy and trade stocks in Africa (with reasonable minimum amounts).
This is largely done through Commission Sharing Arrangements (CSA) with local registered brokers in various markets such as Nigeria, Kenya, Zimbabwe and Mauritius;
– Investing via international exchanges – Some resource companies with operations in Africa are listed on exchanges such as the TSX, ASX or LSE where there are accessible to retail investors.
Likewise, some South African/JSE-listed companies are increasing their exposures in some of Africa’s frontier markets. Investors can gain exposure to these markets by adding such stocks to their personal portfolios; and
– Investment via AfricaFocused Funds – Individuals can access frontier markets by choosing an investment fund run by experienced managers with in-depth, on the ground knowledge of these markets.
Several investment houses in South Africa have set up Africa-focused Funds.
Overall, it should be cautioned that frontier market investing is a different ball game altogether and is not for the novice investor.
Most African economies are still commodity-driven and therefore a slowdown in demand from Asian economies has a bearing on the performance of the economy and stock market.
Risks also remain elevated on the back of currency issues and other policy failures. In addition, frontier markets tend to be volatile and lack liquidity.
Further, trading costs are also high when compared to the JSE and other developed exchanges like the NYSE.
That said, we think the listing of SeedCo International on the VFEX provides an avenue for investors to gain exposure in a regional play with limited foreign exchange risks.
We are long term bulls on SeedCo International given the solid investment case around food demand in Sub Saharan Africa (SSA).
Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor. com
