Bulls n Bears Entrepreneurship Zone :: Andrew Lapping: Investing in Africa – does the value outweigh the risks?

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After a strong 2017, African stock markets continued the trend, making a
decent start to the year. The Egyptian Exchange was up 15% in the first
quarter, while the Nigerian and Moroccan Exchanges made somewhat more modest
gains of 7% and 5% respectively.

No doubt there is less value in African markets than 12 months ago, but is
there still sufficient value to compensate investors for the not
insubstantial risks? Our research indicates yes. The expected four-year
total returns for the fund’s holdings suggest there are good real returns to
be had. This is particularly true relative to many global assets, which have
been distorted by very easy monetary conditions.

There are risks to be aware of. Economic risks include the twin deficits
and managed currencies across African countries. Regulatory risks are also
much higher than in developed countries. We compensate for these risks by
adjusting the valuations of African businesses.

Risks are currently most apparent in the mining industry. Last year
Tanzania hit Acacia Mining with a US$190bn fine and tax bill, Zambia is
claiming $8.04bn from First Quantum for unpaid import duties ($150m relates
to the duty, the remainder to fines and interest) and the Democratic
Republic of Congo is in the process of changing its mining tax regime.

We made very few changes to the fund over the past three months. The
biggest trades were selective additions to existing Nigerian holdings and
some position size reductions in Egypt. We have initiated some small
positions on the BVRM exchange in Cote d’Ivoire, as businesses we have
followed for some time moved into value range.

The majority of the Nigerian banks have reported results for the year to 31
December 2017. The results were as expected, with non-performing loans and
bad debt provisions rising. The banks in Nigeria will find it difficult to
maintain their 2017 returns in 2018 as Nigerian Treasury bill rates have
fallen sharply, which will impact net interest margins. The lower net
interest margins should be offset to some extent by improved economic
activity and greater non-interest revenue. Despite the expected lower return
on equity (ROE), we still think there is good value to be had across the
Nigerian banking sector.

While the  <https://www.howwemadeitinafrica.com/category/sectors/oil-gas/>
oil price has recovered, our oil and gas investments have not performed
quite as we would have hoped. We have added to some of these positions.

The Zimbabwean government is saying the right things and has basically done
away with the Indigenisation Law in an effort to encourage investment.
However, the country still has many issues – not least of which is a dire
shortage of foreign currency brought on by profligate government spending.
We still can’t get any money out of Zimbabwe and the market prices are
distorted by the rush from cash to real assets. We continue to hold
Zimbabwean assets at our estimate of intrinsic value.--Howwemadeitinafrica


<https://www.howwemadeitinafrica.com/andrew-lapping-investing-in-africa-does
-the-value-outweigh-the-risks/61345/andrew-lapping/> 

Andrew Lapping

 

Invest Wisely!

Bulls n Bears 

 

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