Despite rising geopolitical tension, African equity markets have rewarded investors this year. Portfolio manager Rami Hajjar explains the drivers of the recent outperformance.
The Allan Gray Africa ex-SA Equity Fund is up 53.9% year to date, outperforming the benchmark, which is up 39.6%, as well as the S&P 500, MSCI World, and MSCI Emerging Markets indices, which are up 14.8%, 17.8%, and 28.2% respectively. In addition, the Africa ex-SA Equity Fund has gained 46% since the trough following Trump’s “Liberation Day” announcements at the beginning of April.
Two key factors have driven this performance: On the global front, supportive conditions, including a weaker US dollar, expectations of lower interest rates in the United States and a general risk-on sentiment toward emerging markets, have contributed to the broad outperformance of emerging market assets. More specifically within African markets, improved macroeconomic policies in several key countries have led to lower inflation and more market-aligned exchange rates. It is also worth noting that these markets are rebounding from historically depressed valuations and remain significantly undervalued relative to global peers.
Careful stock selection shapes returns
Although both the Africa ex-SA Equity Fund and the benchmark have delivered very strong performance, the contributors have been very different. Our overweight positions in Nigeria and French West Africa have added to relative performance, while our underweight position in Morocco has detracted.
The Nigerian banks we own, namely Guaranty Trust Holding Company, Zenith and Stanbic IBTC, have delivered a fund-weighted average return of 88% in US dollar terms year to date. All three completed successful capital raises under a mandatory programme despite already being well capitalised. This requirement had previously been an overhang, which we have now moved past. More importantly, the outperformance has been driven by investor recognition of the significant revaluation of the banks’ naira-denominated earnings following the currency devaluation, effectively preserving the real value of earnings. These banks were also trading at extremely depressed valuations, and the recent positive sentiment toward Nigeria, underpinned by promising reforms such as foreign exchange liberalisation, a return to orthodox monetary policy, and tax reforms, has further supported a rerating.
Stocks we own on the regional BRVM stock exchange, such as telecommunications company Sonatel, Société Générale bank and tobacco company Sitab, have also been significant contributors to outperformance. These companies have delivered consistent results, benefiting from operating in economies that are structurally better managed than many other African countries and supported by a functioning currency peg regime. There is growing evidence that exchange rate stability is key to driving strong long-term US dollar returns. Importantly, investors on the BRVM are able to access high-quality businesses at undemanding valuations – an opportunity that is notably absent in Morocco, where valuations have remained structurally elevated.
Furthermore, our large positions in Egypt’s Eastern Tobacco and Nigerian energy supplier Seplat have delivered solid returns. Eastern Tobacco is benefiting from a recovery in volumes following the foreign exchange shortages that constrained raw material sourcing during 2023 and 2024, as well as from a more proactive approach to pricing. Meanwhile, Seplat continues to benefit from positive investor sentiment following the successful acquisition of ExxonMobil’s assets, coupled with optimism around the management team’s ability to revitalise the acquired assets and significantly increase oil and gas production from current levels.
Zimbabwe shows signs of recovery
On the flipside, our position in Delta Corporation, Zimbabwe’s largest brewer, detracted from absolute performance, with its share price down 3% in US dollar terms year to date. This has occurred despite improving macroeconomic conditions and enhanced foreign currency availability, as evidenced by the relative stability of the ZiG.
Historically, sharp rallies on the Zimbabwe Stock Exchange (ZSE) have often signalled waning confidence in the local currency; however, the current environment may be indicating the opposite. We believe that continued macroeconomic progress, foreign exchange stability and sustained foreign currency access will ultimately support a rerating of Zimbabwean equities from very depressed levels. For example, Delta Corporation trades at just 6 times earnings, despite delivering a return on equity (ROE) of 45%, consistent volume growth and strong free cash flow generation. It is worth noting that Zimbabwe remains the only market in our universe where sourcing foreign currency remains a challenge for investors. Encouragingly, we have recently been able to access foreign currency, albeit in modest amounts. The Fund’s exposure to the ZSE currently stands at around 6%, the majority of which is held in Delta Corporation, a company that has historically preserved, and we believe will continue to preserve, real value over time.
Despite the significant appreciation in the Fund’s performance, we remain constructive on the return potential going forward. The top 10 holdings are trading at a weighted average forward price-to-earnings (PE) ratio of 11 and a dividend yield of 5.7%, while generating a weighted average return on equity of 42%. This compares to forward PE multiples of 23, 20, and 14 for the S&P 500, MSCI World and MSCI Emerging Markets indices, respectively. The upside remains substantial. Realising this potential will largely depend on continued improvements in macroeconomic management across key markets, sustained foreign exchange stability and a supportive global backdrop.