The case for investment exposure in SSA

An important discussion topic at the Zimbabwe Association of Pension Funds (ZAPF) Conference held in November 2021 was on the need for Pension Funds in Zimbabwe to invest offshore. The rationale being that there is need to have balanced investment portfolios that offer diversification advantages for investors.

In the field of portfolio management, for one to be considered a well-balanced portfolio, it should offer the best returns while exposing the portfolio to the least risk. We think geographical diversification is of paramount importance as it limits downside risk. By focusing investments in one market, such as Zimbabwe, a portfolio is prone to a significant risk of decline.

An interesting case study relates to global investment funds such as Norfund, FMO and Rabobank.  There three entities are cornerstone investors in Arise, which in turn has an 18% stake in NMBZ Holdings as well as several fintech and financial services groups on the African continent. Norfund is a Norwegian Investment Fund that has an objective to reduce global poverty while FMO is a Dutch development bank focused on impact investing in developing countries and emerging markets.

On the other hand, Rabobank is an all-finance bank with a strong presence in the Netherlands. Arise is a good example of an investment vehicle that offers geographical diversification. Similarly, funds in Zimbabwe should also seek exposure in Sub Saharan Africa (SSA) as a strategy to diversify sovereign risk.  It should be highlighted that the economic performance in Sub Saharan Africa (SSA) since the turn of the twenty-first century has been remarkable, even in the aftermath of the global financial and economic crisis.

We recall that GDP growth averaged c5.0% and consistently outperformed global economic trends. In addition, contrary to the notion that growth in Africa is attributed to a boom in global demand for commodities, the resources sector only contributed about a quarter to the impressive post-2000 economic expansion.

While Nigeria, Ghana and Kenya are the most prominent equity markets in terms of size and capital-market development, Tanzania, Uganda and Zambia also have strong potential. In addition, most SSA stock markets have posted high returns and offer diversification benefits.

While a strong dollar, some macro-economic constraints and commodity price volatility combined to make the emerging and frontier markets unattractive to global macro investors over the past couple of years, the trend in now changing. More recently, we have seen some buying interest come back because of a weaker dollar and pro-Emerging Market (EM) equity allocations.

A key highlight is that SSA equity valuations are close to their historic lows despite a decade of real positive fundamental change. There is therefore scope for a re-rating on the back of important themes driving growth in Africa such as (i) financial inclusion, (ii) faster rates of urbanisation and (iii) economic formalization.

These trends are driving strong growth in the Fintech, Payments, Banks, Telco and Healthcare sectors. We contend that these key transformational trends underpin a robust African consumer story that is taking shape regardless of global volatility. As highlighted during the Zimbabwe Association of Pension Funds (ZAPF) Conference, the following are recommendations to policy makers and industry players;

• Diversification of sovereign risk is critical for investment portfolios;
• There is need to fast-track the regulatory framework on offshore investments with regards to institutional investors in Zimbabwe;
• Focus should be on Sub- Saharan Africa (SSA) as a first-step. This will then pave the way for the exploration of Global Equities; and
• Care needs to be taken to balance offshore exposure against maintaining appropriately prudent risk profiles. This could include replacing limits on asset categories with regulations that set limits on credit risk or introducing risk-based portfolio limits.

In conclusion, there is need for upskilling as well as engaging experts in order to effectively navigate SSA and global equity markets.

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