In that article, I predicted that Ghana, Zambia, and Cote d’Ivoire would be the best-performing African stock markets. I hadn’t specified a time frame, but with over a year past, I think it’s a fair time to evaluate my accuracy (or lack thereof).
The chart below shows how I predicted the markets would rank on the left and the exchanges’ actual performances on the right.
Market Performance: Forecast vs. Actual
| Exchange | Forecast Rank (May 2, 2012) | Actual Performance Rank (as of May 31, 2013) | Dollar-Adjusted Performance (May 1, 2012 - May 31, 2013) |
|---|---|---|---|
| Ghana Stock Exchange | 1 | 2 | +65.6% |
| Lusaka Stock Exchange | 2 | 6 | +10.5% |
| BRVM (Côte d'Ivoire Stocks Only) | 3 | 5 | +39.8% |
| Nairobi Securities Exchange | 4 | 3 | +61.0% |
| Uganda Securities Exchange | 5 | 4 | +57.2% |
| Namibian Stock Exchange | 6 | 9 | -2.6% |
| Nigerian Stock Exchange | 7 | 1 | +70.5% |
| Botswana Stock Exchange | 8 | 7 | +5.2% |
| Stock Exchange of Mauritius | 9 | 8 | -1.2% |
| Johannesburg Stock Exchange | 10 | 10 | -14.1% |
Where to Invest in Africa Now
Now let’s see what my crystal ball is telling me will happen over the next 12 months.There’s actually no magic here. We simply want to identify the markets with the best combination of growth and value. The logic being that a fast-growing economy offers companies an environment with ample opportunity to increase earnings. This is counterbalanced by a measure of stock market valuation to get a sense of how much of the growth story has already been factored into stock prices.
To get a handle on the growth part of the equation, I consult the IMF’s latest World Economic Outlook. This is where I find GDP growth forecasts from the present day to 2018. I then calculate a composite growth rate by giving the shorter-term forecasts higher weights and the more speculative long-term forecasts lower ones. The chart below shows these composite growth rates.
IMF Forecast of African Economic Growth
| Country | Projected GDP Growth (2013 - 2018) |
|---|---|
| Côte d'Ivoire | 7.86% |
| Zambia | 7.85% |
| Nigeria | 7.05% |
| Ghana | 6.51% |
| Uganda | 6.19% |
| Kenya | 6.15% |
| Zimbabwe | 5.41% |
| Mauritius | 4.28% |
| Botswana | 4.27% |
| Namibia | 4.19% |
| South Africa | 3.18% |
Thus, we now turn our attention to stock valuations in these countries. To get a sense of relative value, we’ll compile the price/earnings ratios of the ten largest stocks on each exchange. Then, we’ll eliminate the outliers – the lowest and highest P/E ratio. Finally, we average the P/E ratios of the eight or so remaining stocks. You can see the results of all this number-crunching below:
P/E Ratios of African Stock Markets
| Exchange | Price/Earnings Ratio (Avg 10 Largest Stocks) |
|---|---|
| Uganda Securities Exchange | 8.39 |
| Namibian Stock Exchange | 9.40 |
| BRVM (Côte d'Ivoire Stocks Only) | 10.63 |
| Botswana Stock Exchange | 11.08 |
| Lusaka Stock Exchange | 13.27 |
| Nairobi Securities Exchange | 14.33 |
| Zimbabwe Stock Exchange | 14.35 |
| Stock Exchange of Mauritius | 15.08 |
| Ghana Stock Exchange | 17.51 |
| Johannesburg Stock Exchange | 17.85 |
| Nigerian Stock Exchange | 20.64 |
To assess the best combination of growth and value, we divide each market’s P/E ratio by its home economy’s forecast growth rate. This market PEG ratio is shown in the table below.
Balancing Growth and Value
| Exchange | Price/Earnings/Growth Ratio |
|---|---|
| BRVM (Côte d'Ivoire Stocks Only) | 1.35 |
| Uganda Securities Exchange | 1.36 |
| Lusaka Stock Exchange | 1.69 |
| Namibian Stock Exchange | 2.25 |
| Nairobi Securities Exchange | 2.33 |
| Botswana Stock Exchange | 2.59 |
| Zimbabwe Stock Exchange | 2.65 |
| Ghana Stock Exchange | 2.69 |
| Nigerian Stock Exchange | 2.93 |
| Stock Exchange of Mauritius | 3.52 |
| Johannesburg Stock Exchange | 5.62 |
It’s interesting to note that most African markets are more expensive now than they were 13 months ago. So, we probably won’t enjoy the eye-popping performance from African indexes that we’ve enjoyed over the past couple years.
