Africa’s lions poised for growth

Nigeria and Kenya should outperform their frontier market peers because of strong economic fundamentals and attractive valuations, managers have said.

Neptune’s Shelley McKeaveney, who runs the group’s Africa fund, said Nigeria’s economic outlook remains robust and valuations are generally undemanding, particularly in the banking sector.

“Concerns in the first quarter around currency vulnerability, potential aggressive tightening and changes to central bank leadership saw the market sell off sharply but these have largely dissipated, and the market has bounced back to levels seen at the start of the year,” added Ms McKeaveney.

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“While risks remain, we feel the strong earnings outlook, coupled with attractive valuations, will support outperformance.”

Michael Levy, manager of the Baring Frontier Markets fund, agreed companies such as Guaranty Trust Bank, Zenith Bank and Nigerian Breweries have put the country at the forefront of frontier market opportunities.

“Africa’s largest economy, Nigeria, recently rebased its GDP upwards to $500bn (£294bn) for 2013, ranking the country as the 26th largest economy in the world, and the general elections in 2015 could provide further opportunities for investors in a country undergoing significant reforms,” he said.

“A good example of a frontier market opportunity is Zenith Bank. While the second-largest bank in Nigeria has benefited from a cautious approach to risk, we forecast loan growth to sustainably and profitably top 15 per cent per year, and its highly liquid balance sheet has a capitalisation ratio among the highest in the world.”

Andrew Lister, co-chief investment officer of Advance Emerging Capital, said frontier dedicated funds had in excess of $20bn, up from $10.8bn in 2013, with Nigeria and Kenya offering “attractive long-term growth and reasonably valued equities”.

“Recent research from Standard Chartered highlights the rising African middle class as a future driver of investment returns, particularly in Nigeria, Ghana and Kenya,” he said.

“An astonishing 85 per cent of wealthy Nigerians plan to buy a new car in the next five years.

“Kenya’s middle class has the highest proportion of entrepreneurs of any frontier market, and is rapidly developing as a regional hub for both IT and energy companies.”

Mr Lister said Nigeria traded on a consensus 12-month forward price-to-earnings ratio (p/e) of 10x, with earnings growth in 2014 forecast at a “healthy” 13.6 per cent, while Kenya traded on a consensus 12-month forward p/e of 12x, with 2014 earnings growth expected to be 19 per cent.

Elsewhere, Ms McKeaveney said stockpicking in South African equities would be crucial to outperformance given a challenging economic environment, and that she favoured businesses with overseas earnings.

In spite of the poor macroeconomic backdrop in South Africa, however, the equity market has produced solid growth this year, with 60 per cent of FTSE/JSE Top 40 earnings coming from outside the country.

Ms McKeaveney says the geographic spread of earnings is broad, with roughly 15 per cent coming from Africa and the rest from around the world, and some of this year’s strength can be attributed to strong performance from global blue-chip names such as Naspers, Sasol and Steinhoff.