South African investors have a keen interest in offshore investing for a variety of reasons. The JSE is a small market and doesn’t offer exposure to many major companies or industry sectors. Currency diversification is also a need, given the rand’s long-term downward trend against major currencies. Regulatory relaxation since 1994, coupled with the lifting of sanctions and South Africa’s integration into the global economy, has opened international investment options that were not previously available.
While many investors focus on gaining exposure to equity markets like the US, the UK and, to a lesser extent, Europe and Australia, they may be missing out on an asset class right under their noses: African equities.
Much could be written about disastrous African expansion forays by JSE counters, but investing in local or regional players operating in their own markets is a different proposition.
Indeed, the S&P Africa Frontier BMI, a comprehensive benchmark index including stocks from Sub-Saharan frontier markets such as Botswana, Ivory Coast, Ghana, Kenya, Mauritius, Namibia and Zambia, but excluding South Africa, has returned an impressive 45.72% over the past 12 months and 15.3% annualised over the past three years, all in dollar terms.
Tim Staermose, who runs the African Lions Fund from Dar es Salaam in Tanzania, is constructive on the outlook for the African equity class, which, he argues, asset allocators globally ignore despite its return potential and diversification appeal.
Staermose says his investors include a mix of high net worth individuals and family offices that understand the African opportunity. These investors hail from all around the world, including Australia, the Netherlands, Belgium and South Africa.
One of the reasons Staermose is bullish on African equities is that after the lost decade of 2014 to 2024, the landscape and outlook have shifted, and equity prices are starting to respond to improved economic and political conditions.
This is also evident in new IPOs coming to market. Botswana will soon see its first IPO in 20 years, and Dangote Refinery has launched its IPO process in Nigeria. This will add to Dangote’s listed cement, sugar and foods businesses; its fertiliser business is also scheduled for an eventual IPO. Perhaps we may even see the holding company itself listed, akin to Remgro.
The Dangote Refinery IPO couldn’t come at a better time, given where oil prices are and with no end in sight to the Middle East conflict. An interesting point from the IPO roadshow was the strong push for retail investor participation, which emphasises the maturing nature of local capital markets.
Staermose highlights the rise in local retail investors in markets such as Tanzania and Kenya and the launch of more ETFs and other passive products aimed at them. He notes that, for example, NMB Bank in Tanzania (a top holding in the African Lions Fund portfolio) recently undertook a 10-for-one stock split, “to improve the affordability and tradability of NMB Bank Plc shares and to broaden retail participation in the capital markets”, according to NMB. Airtel Money is also set to list in London, with an IPO due before the end of 2026. The Financial Times reports that the Airtel Money FTSE IPO is targeting a valuation of around $10bn and aims to raise about $1.5bn. So there is plenty of activity in the region.
Of course, the risks cannot be ignored. These include currency risk, political risk, hyperinflation and economic risks, as well as property risk around minority shareholder rights and repatriation of profits. You could counter this by saying the global economy is awash with geopolitical risks of all sorts and that many developed economies have been stagnant for years. Take, for example, the concentration risk of US equities in global indices and the subsequent risk caused by a few mammoth stocks within that overall equity asset class.
African equities offer an opportunity to diversify away from developed-world stocks and economic drivers by providing access to domestically and regionally focused telecoms, financial services and consumer goods businesses operating in different market environments from the developed world and advanced emerging markets.
There is a slew of mining, energy and other commodity-focused stocks to choose from. But here investors are more exposed to global, generally US dollar-based, prices and developed-world customers for the end product rather than getting exposure to the domestic and regional economic and growth story.
Several vehicles aside from the African Lions Fund provide access to the asset class, including the Allan Gray Africa ex-SA Fund and the Coronation Africa Frontiers Strategy, among others.
Given the limited universe of stocks on local bourses, the majority of funds in this sector use strategies that qualify investments as being listed on either the local bourse or an overseas bourse but which must generate the bulk of their revenue and profits from African markets. The Airtel Money IPO would fall into this international listing with African operations bucket.
Hopefully growth in retail investors and the broader development of local equity capital markets will have a positive effect on overall market liquidity and attract more domestic companies to list locally rather than internationally. This would markedly improve the depth and diversification of local markets.
ETFs to access the asset class are few and far between, and the drawback for South African investors is that most of the indices tracked by the few Africa-focused ETFs available tend to be pan-African in construction. In other words, an investor gets a good dollop of the JSE stocks and South African geographic exposure within the ETF, diminishing the diversification benefits. The two JSE-listed ETFs previously operated by Cloud Atlas — the AMI Big50 (ex-SA) ETF, a Pan-African equity fund which offered exposure to 50 stocks across 15 African exchanges, and the Cloud Atlas S&P African Bond ETF, a pan-African hard currency sovereign bond fund — were both delisted following Cloud Atlas’s acquisition by EasyEquities. Nothing has replaced them, so the only Africa-focused ETFs available are listed offshore.
One of Staermose’s top picks in the current portfolio is Safaricom, with cellular services giant Vodacom the dominant shareholder. Almost 50% of Safaricom’s profits now come from its M-Pesa mobile money and financial services solutions. M-Pesa never really caught on in South Africa, but is an integral part of the payments ecosystems in Kenya and Tanzania and a credible player in several other African markets.
Given the size of the payments business within Safaricom, Staermose reckons the sum-of-parts valuation looks undemanding when applying a fair multiple to the telecoms business and the fintech payments business, coupled with the growth opportunity for both divisions.
The demographic dividend is also now accruing to the continent, where the median age is roughly 19. China’s demographic dividend has long since passed, with a median age nudging over 40, not far behind the EU’s 45. Africa’s youth are even younger than India’s, whose median age is 29. Not all companies will benefit from so many young adults entering the world of work, but a business like Safaricom should be a net beneficiary, along with local financial services players.
African equities might not be for every investor, and many South Africans may have been scared off after seeing local JSE counters reporting huge writedowns from investments in the continent. But that is a different proposition from a fund that invests in long-standing local businesses operating in their own markets or regions.
These companies understand how their markets work, including the cultural nuances and operational risks that can’t be seen from a boardroom in Cape Town or Joburg and which have been the undoing of many African expansion strategies by South African companies.
African equities may be a bit off the radar, perhaps even a bit esoteric, despite being in South African investors’ backyard. But if the cycle has turned, it might be worth another look at the funds active in this space or some of their large portfolio holdings as a starting point.
