Africa Investing

By pjain      Published July 15, 2021, 3:45 p.m. in blog Geo-Politics   

Africa Investing 4US

Stocks to follow/Screen

EZA AFK NGE EGPT GAF

Potential for Africa Economies from Hopeless Continent

Over the last 20 years, Africa has gone from being seen as a "hopeless continent" in terms of its financial potential, to an interesting prospect for emerging market investors.

Colonial AG, Commodities and Energy

The African continent is rich in natural resources.

1, Energy It has huge, untapped reserves of natural gas and oil (10% of the world’s reserves) and largely unexploited hydroelectric power.

  1. Minerals It is home to vast gold, platinum, uranium, iron ore, copper and diamond reserves.

  2. Ag commodities - only 10% of Africa’s arable land is being cultivated, yet it holds around 60% of the world’s cultivable land. However water and investment in irrigation is badly needed.

Lack of Infrastructure kills trade, boosts costs, kills EC

Africa has a low human density and per capita income. This adds to its lack of infrastructure. It makes it hard for companies to get electricity, roadways, and other needed components to operate in some areas.

Very Poor Subsistence Economies and Per Capita Income

POTENTIAL: Middle class Consumption - China wants In!

Africa's population accounts for about 17% of the world with nearly 1.4b people living in more than 60 territories as of 2021.2

It COULD creates a huge market for consumer goods, such as telecommunications and banking, if can figure a way to monetize it and get paid with very low African incomes.

By 2030, over 40% of Africans will belong to the middle or upper classes, and there will be a higher demand for goods and services. In 2030, household consumption is expected to reach $2.5 trillion, more than double that of 2015 at $1.1 trillion. - World Economic Forum

Much of that $2.5 trillion will be spent in three countries: Nigeria (20%), Egypt (17%) and South Africa (11%).

But Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, and Tunisia will attract companies seeking to enter new markets. The sectors expected to grow the most in the next 30 years are food and beverages, education and transportation, housing, consumer goods, hospitality and recreation, healthcare, financial services, and telecommunications.

Politics and Demographics an Issue

North Coasts, Sub-Sahara, West or South

North

Northern Africa is much the same as much of the Middle East in terms of its oil assets and major industries. Northern Africa consists of Algeria, Egypt, Libya, Mauritania, Morocco, Tunisia, and Western Sahara. Many of these countries are known for their crude oil reserves. Libya holds Africa's largest oil reserves, the ninth largest in the world.1

Sub-Saharan Africa

Dominated by warlords it is still not very open to international investors. It includes lesser developed economies.

West Africa - Lush, Oil Rich

South

South Africa is thought to be a more developed market with its strong mining industry.

South Africa is the most popular place to invest in this part of the world. It's driven by raw materials and mining to a great extent. It is the largest producer of gold, platinum, and chromium in the world. But its agricultural and banking sectors are also fairly large. Its consumer class is slowly easing their reliance on exports, and this fuels domestic services growth.

Corruption

Many governments are known for their corruption and can lead to a number of problems, ranging from extortion to nationalizations.

Lack of Rule of Law or Economic Policy

The lack of policy can make it complex to do business here. Companies face a number of hurdles, from civil wars to political risk, as they compete in the region's healthy economies.

Political Governance Gradually Stabilizing

There is increasing stability in terms of governance; the countries that witnessed terrible periods of unrest have emerged as success stories.

There are better policies in place, trade has improved and so has the business environment.

Warlords and Regional Conflicts Hurt Economy

Africa is well known for its civil wars and conflicts. They've taken a toll on its population.

Regime change can also be very hard for companies to deal with because it causes a great amount of uncertainty.

Population Dividend or Liability

Africa also has the advantage of a large and relatively cheap educated labor force. The continent is undergoing a demographic transformation, with youth as its theme; there is a very high proportion of Africans in their 20s and 30s with fewer dependents – both old and young – that will play out over the next decade.

Massive Intervention and Exploitation - US, France, Italy are the worst

China Most Effective FDI starting from East Africa - Problem of Debt Bombs

ETFs, Geo-Political Keys and Trends, By Country

--- Broad Africa

AFK Broad Africa $65m 114-no

VanEck Vectors Africa Index ETF U.S. Based MNCs LCap

  • Dow Jones Africa Titans 50 Index. This index focuses on companies that are located in Africa and are listed on the African Stock Exchange. These companies also conduct 50% of their business in the region.

It's country allocation has Egypt (21.4%), South Africa (20.7%), Nigeria (15%), United Kingdom (12.6%) and Morocco (6.6%).

Some of the top holdings in the fund and index are Nigerian Breweries, Tullow Oil, Attijariwafa Bank, and Orascom Construction.

GAF Africa and the Middle East

  • SPDR S&P Emerging Middle East & Africa ETF
  • S&P Mid-East and Africa BMI Index (STBMMEU)

GAF targets Africa and the Middle East and includes some of the same top holdings as EZA but also includes AngloGold, Impala Platinum, and Firstand.

It is allocated 78.39% to South Africa, followed by the United Arab Emirates (8.23%), Qatar (7.72%), Egypt (3.97%) and Morocco (1.61%).

Sectors represented in the SPDR are Financials, Materials, Telecommunications, and Consumer Discretionary.

Mutual Funds

Mutual funds that invest in Africa include the Alquity Africa Fund (ALQAFBG:LX), Investec Pan Africa (INVPNAS:GU), Neptune Investment funds II – Neptune Africa Fund (NEPAFRB:LN), JPM Africa Equity (JPMAACU:LX), Commonwealth Africa Fund (CAFRX) and Nile Pan-Africa Fund A (NAFAX).

OTC

There is a wider universe of African stocks that trade on the Pink Sheets or over-the-counter (OTC) market. Pink sheets are less regulated and are traded in thin volumes.

--- Nigeria - Africa's top Economy

NGE Xx Nigeria $43m 0.9% 25-no

Global X MSCI Nigeria ETF

MCSI All Nigeria Select 25/50 Index performance with extra holdings.

Sector - index and the ETF are both primarily made up of consumer staples, financials, and materials.

Top holdings in the ETF are Dangote Cement, Guaranty Trust Bank, Zenith Bank, FBN Holdings, and Sterling Bank.

The portfolio includes about 20 stocks of companies that are either based in Nigeria, listed on Nigerian markets or whose revenues are primarily from the country. NGE charges a relatively steep management fee for a passive fund, but investors for fast and easy exposure to Nigerian equities via a U.S.-listed fund shouldn’t be deterred by a few extra basis points in fees. As with many country-specific funds, especially in emerging and frontier markets, liquidity can be a challenge, and large block orders could trigger price distortions in the underlying market. Investors should expect wider spreads and poor tracking.

--- S. Africa - No. 2 Economy

South Africa's credit rating is lowered, the impact could be negligible because the country doesn't account for significant percentages of those funds. For example, the widely followed J.P. Morgan EMBI Global Core Index allocates just 2.92% of its weight to South African debt.

Pop 58m, GDP growth 1%

Yet high unemployment at 25% in mid 2020 has called into question the sustainability of economic growth without a firm backing from natural resources, and that's been a key issue in producing losses for the stock market in South Africa.

Timeline

South African stocks and EZA etf not only continuing to lag the MSCI Emerging Markets Index but faltering as well.

  • July 2021 Africa Zuma removed Finance Minister Pravin Gordhan and then resigned himself. South African Communist Party, an ally of the governing African National Congress, had earlier lodged a formal objection to plans to dismiss Mr. Gordhan
  • Elections to be held
  • 2020-21 Very low vaccination rates for Covid - will backfire eventually - right now isolation keeping deaths low

Bonds, Credit Ratings, Declining Currency - MULTI-YEAR PROBLEM

  • Sep'18 “The recent rand depreciation has complicated the policy reaction to low GDP growth .. We think the depreciation primarily reflects the rand's role as a proxy for emerging market currencies during times of broader emerging market risk aversion. But domestic factors including the recession and discussions about land reform have also contributed to outflows... South Africa's latest economic plan is unlikely to deliver a significant boost to economic growth [- take time]” - Fitch Ratings
  • Followed intense reaction against S.Asians-Govt Nexus - S.African Currency dips and so does ETF
  • South African stocks suffered from a stronger U.S. dollar.
  • South Africa remains weak amid low business and consumer confidence, while recurring power outages have weighed on manufacturing and mining output,
  • Economic weakness raises the country’s risk profile and it may increase the chances of a credit downgrade.

  • Jun 2019. Africa's second largest economy behind Nigeria, has a tenuous grasp on an investment-grade credit rating, having narrowly dodged a downgrade to junk status by Standard & Poor's late last year. S&P and Fitch Ratings currently have BBB- ratings on South African sovereign bonds, the lowest investment-grade rating.

  • Jun 9, 2019 - South African President Cyril Ramaphosa, ANC, whom just came off an electoral win to have a 5-year term, will help turn the tide after “a decade low” for investor sentiment and economic stability amid rampant political corruption. His challenge is to sort out Eskom which is causing major power shortages, put corrupt people in prison and drive a reform agenda - there could be quite a big upswing there

Bond yields have compressed half a percentage point from a peak in November,” according to Barron's.

  • Aug 2019 - South African companies have been struggling to turn out a profit as strained consumers reduced spending and faced a weak growth outlook amid continued political uncertainty. Consequently, many believed monetary stimulus by a typically cautious central bank may be the only short-term solution.
  • 2019 SARB Reserve Bank of South Africa has been cutting rates this year to prop up a flailing economy, Africa's largest, but that isn't doing much to allay credit concerns by the major ratings agencies.

  • End 2019 Moody's Investors Service lowered its forecast for South African economic growth. That's relevant because the ratings agency will review South Africa's Baa3 credit rating next month and plenty of market participants are bracing for a downgrade - it lowered its forecast for gross domestic product growth to 0.7% in 2020, from 1%, and predicts expansion of just 0.9% in 2021. Moody's downgrade could force South Africa out of the FTSE World Government Bond Index, which could prompt a sell-off and outflows of as much as $15 b

  • Nov 19 Standard & Poor's lowered its outlook on South African sovereign debt to “negative” while maintaining a junk rating of BB.

Consumer discretionary

Mining is Vital for profits - Mostly Depleted Now!

South Africa is among the richest nations in the world in terms of natural resources, with a wealth of gold, platinum, and diamond mining assets that have brought enormous influxes of capital into the country. However, those valuable assets have to be mined, and recently, unrest among laborers who work under harsh conditions has caused turmoil across the South African economy, exacerbating already nervous investors who have watched prices of gold stagnate and platinum plunge in recent years.

South Africa is a major precious metals producer, exposing its economy to weak commodities prices and the strong dollar. EZA devotes 13.35 percent of its weight to materials stocks, the fund's third-largest sector weight and enough to be a drag on the ETF while gold prices stumble.

But EZA is not overtly reflective of South Africa's status as a major metals producer. The materials sector is 6.2 percent of the ETF's weight. Financial and consumer stocks make up almost 70% of the portfolio, with materials a distant third.

  1. GOLD The country is a major gold producer

  2. Largest platinum producer 10% of platinum mining is rhodium, one of this year's best-performing commodities. EZA hasn't benefited much from the ongoing surge in palladium, a commodity of which South Africa is the world's second-largest producer.

  3. second largest palladium-producing nation.

Energy - Sasol dominates

Financial services

EZA S.Africa y4.6% Aum $500m 0.8% 50-no c48\ (25 55)

iShares MSCI South Africa ETF
http://www.vaneck.com/index.cfm?cat=3192&cGroup=ETF&LN=3-02&tkr=AFK&LN=3_02

This fund offers broad exposure to continent of Africa, focusing in one numerous emerging markets in the region. AFK is heavily weighted towards the continent's largest economies with South Africa, Egypt, and Nigeria dominating the top holdings.

The focus is large and mid caps but since many ETFs focus in on other regions of the world, it is likely that investors have little in terms of African exposure in their portfolios. AFK may be appropriate for investors seeking more exposure to the Southeast Asia region as most ETFs offer little in terms of investment in the area. EZA allocates 62% of its combined weight to the financial services and consumer discretionary sectors.

Some of the top holdings include MTN Group, Sasol LTD, and Naspers LTD.

But EZA is not overtly reflective of South Africa's status as a major metals producer. The materials sector is 6.2 percent of the ETF's weight. Financial and consumer stocks make up almost 70% of the portfolio, with materials a distant third.

Some of the top sectors represented in the fund are Financials, Materials, Telecommunications, and Consumer Discretionary.

FLZA

Franklin FTSE South Africa ETF It tracks the FTSE/JSE South Africa Capped Index reflecting the performance of South African large and mid-cap stocks. The fund comprises 82 holdings. Sectors having double-digit allocations comprise Financials (26%), Consumer, Cyclical (25%), and Consumer, Non Cyclical (10%). The fund has been able to amass $2.5 million since its inception on Oct 10 and has an expense ratio of 0.19%.

Egypt

Economy $363b GDP, $3000 per Capita

Egypt's economy is one of the most developed countries in the Middle East/African region, with a gross domestic product (GDP) of approximately $363 billion in 2020 and approximately $3,058 per capita in 2020.

Egypt, like many larger countries, has an economy that is dominated by the service and industrial sectors; at the same time, it is also known for its agricultural sector, which is a significant source of employment.

Egypt's stock exchange is also one of the most developed in the Middle East/African region, with more than 600 listed companies and $6 billion in annual turnover.

KEY issue with the lack of diversification offered by the markets. There are only four companies that account for a large portion of the country's economy, while the financial industry has also been overly represented.

Other than EGPT one can directly buy ADRs are Commercial International Bank S.A.E. ADR (CIBEY), Orascom Construction Industries S.A.E. ADR (ORSCY), and Ghabbour Auto S.A.E. ADR (GBAXY)

Timeline

2011 fall of Hosni Mubarak While the markets were shut down for a period of time 2012 Markets re-opened, and the economy began to show signs of recovery by late 2012.

EGPT X $21m 1% c25 (22.6 28)

Only pure play fund offering exposure to the Egyptian economy. The Market Vectors Egypt Index ETF (EGPT) gives access to Egypt, the third-largest economy in Africa, with an allocation of around 85%. The remainder is spread to geographically diversify across Luxembourg, Canada, and Ireland.

Egypt relies on local Middle Eastern markets that has tremendous return potential but that can also be quite volatile.

PROBLEM: Sector biases towards financials is certainly worth taking into account.

Africa Best Companies By Sector

Consumer Staples, Foods, Discretionary

Tech, EC, Mobile, mPay

EC, mPay vital

Takealot, Jumia and Konga Africa has had the most rapid Internet growth rate in the world…, [which] has lead to consumers and producers seeing the advantages of ecommerce with convenience forming the major enticing factor for online businesses

PROBLEM: EC in Africa severely hurt by lacking a delivery infrastructure and secure payment methods. Several countries lack even an organized physical address system, and cash on delivery is the main payment method that online merchants

PROBLEM: Africa is SUPER LOW ASP - deathbed of many telecom, EC companies - costs of doing business exceed profit potential in dealing with very low per capita incomes.

MTN Group, S Africa

MIXT

MiX Telematics is in the logistics technology business.

JMIA Xx c23 [(5 24) 60]

  • THESIS
  • 100%+ doubling or tripling if it goes from $10 to $20+ esp if fall to $5
  • Massive DE 5x Losing money -165m on 163m sales
  • BULLSHIT CO - all talk no profit
  • RISKY for most long-term retail investors

  • VALUE

  • Value since Q2'20 earning, JMIS stock has more than halved. On Aug. 11, it closed at $16.37. No, they are around $7.8.

  • FY'20 Q2 Aug - Sales -10% vs most EC which was up on Covid, Margins are low, Co burning lots of cash!
  • Sales -10% vs most EC which was up on Covid, Margins are low, Co burning lots of cash!
  • orders went up by 8% in the quarter. And annual active customers increased by 40% to reach 6.8 million. JumiaPay, its digital payments platform, wa another bright spot.

  • CORE: Internet provider and online marketplace

  • Jumia has the first-mover advantage and been growing its operations. In 2019, it had around 6.1 million active customers and 110,000 active sellers.
  • Serves 600 m “accounting for more than 70% of Africa’s GDP of €2 trillion and almost 70%3 of Africa’s internet users.”
  • The Jumia and Konga E-Commerce platforms … are easily the biggest and top ranking E-Commerce sites, as well as two of the top 10 most visited sites in Nigeria and Africa, as seen on Alexa rankings

  • SEG: EC supply chain, logistics

  • SEG: payment services Payment volume was up 106% in Q2'20.

  • About Jumia Tech, Berlin

  • present across 11 countries In addition to

--- Durables, Appliances, Autos

GBAXY, Egypt Autos

Ghabbour Auto S.A.E. ADR (GBAXY)

--- Housing, Infra, Construction

ORSCY, Egypt Construction

Orascom Construction Industries S.A.E. ADR (ORSCY)

--- Health

--- Utils, Telecom, Div

--- Precious Materials

AU AngloGold Ashanti, S Africa

DRD DRD Gold

GFI Gold Fields

HMY Harmony Gold

GOLD Randgold

Impala Platinum, S Africa

Sibanye Gold

Firstand ??

Materials, Industrial

Dangote Cement, Nigeria

Energy, Oil, Environmental

SSL Sasol LTD, S Africa

oil and gas business.

Finance, Banking, Fintech

Naspers LTD, S. Africa - buy on dips!

CIBEY, Egypt Bank

Commercial International Bank S.A.E. ADR (CIBEY)

Guaranty Trust Bank, Nigeria

Zenith Bank, Nigeria

FBN Holdings, Nigeria

Sterling Bank, Nigeria


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