Where to Invest Now: The Most Promising African Stock Markets

African stock markets have put together an incredible run of late. This has prompted several readers to ask which one looks like the biggest bargain now.

So, I thought it would be a good time to look back at a post that attempted to answer this question 13 months ago to see how well my forecast panned out.
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%

As you can see I was a bit too enthusiastic about Zambia and Namibia, and I didn’t anticipate the Nigerian Stock Exchange’s tremendous performance. Overall, however, I felt the ranking did pretty well at picking winners and losers. It got four out of the top five right, and was right on the money by singling out the Johannesburg Stock Exchange as the least attractive market.

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%

So, the IMF believes Cote d’Ivoire, Zambia, and Nigeria will each grow their economies at an annual rate of seven percent or more between now and 2018. It stands to reason, therefore, that certain businesses are going to do quite well. But, as prospective investors, we can’t stop our analysis there. We want to find the stocks in fast-growing economies, but we don’t want to pay much for them.
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

In terms of earnings multiples, Ugandan and Namibian stocks look darn cheap. But I’d much rather own a Ugandan stock sporting an 8 P/E than a Namibian one with the same ratio. Why? Because Uganda’s economy is forecast to grow so much faster.
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

So, our model suggests Cote d’Ivoire, Uganda, and Zambia are attractive markets at the moment, while stock bargains will be more scarce on the Johannesburg Stock Exchange and Stock Exchange of Mauritius.
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.

Over to You

Does the forecast sound plausible? Which African market looks the cheapest and/or dearest to you? Let us know in the comments!