Don’t get caught by Africa’s oversold growth story
12 July 2013
Africa’s growth story may have been oversold, according to value-based asset manager CM.
Analysts Amedi de Klerk and Faure Heymans warned this week that investors “be wary about getting caught up in the hype around the predicted economic growth on the African continent”.
Sub-Saharan Africa’s gross domestic product (GDP) is expected to grow more than 5 percent this year compared with growth of 3.1 percent globally and 2 percent in South Africa. But De Klerk and Heymans said the continent’s growth expectations were already factored into the price of listed equities in the region. After visiting four African countries, De Klerk said: “Where we did find value, liquidity was limited and where liquidity was available, valuations were excessive.”
De Klerk added: “There is no correlation between a country’s growth and the performance of its equity investments.”
Meanwhile, Africa’s prospects are dimming. The continent’s fortunes are closely linked to China’s demand for commodities. But growth is slowing in the world’s second-largest economy and latest data show its demand for other countries’ exports is falling. China has been South Africa’s biggest export market in recent years – almost entirely for commodities – and the major source of export revenue for Africa.
Frontier Advisory chief executive Martyn Davies said: “China’s growth model over the past two decades has been incredibly resource intensive with fixed asset investment spend upwards of 50 percent of GDP per annum. This has driven the so-called commodity supercycle and has largely underpinned the African growth story the past decade considering the resource-dependent nature of sub-Saharan economies.”
He said the commodities super cycle had cooled. “While China’s growth remains robust, the days of double-digit or high single-digit growth are over. Also, as China has now reached middle-income status, its resource intensity per capita will decline in line with the experience of all other markets.”
The Chinese economy grew only 7.7 percent in the first quarter, disappointing economists’ expectations of 8 percent and down from 7.9 percent in the previous quarter. Earlier this week the International Monetary Fund cut China’s growth forecast for the year to 7.8 percent from 8 percent previously.
Private sector economists had already downgraded their expectations. Last month Standard Bank researcher Jeremy Stevens lowered his growth forecast for the year from 7.7 percent to 7.5 percent.
Second-quarter figures on GDP are due on Monday.
The question is: to what extent will this translate into lower growth in Africa?
Davies said: “Much will depend on the oil price considering that no less than 40 out of 54 African states have either discovered or are exploiting oil resources.” Oil prices have slumped recently and demand for Africa’s oil from the US has fallen due to the latter’s shale gas activity. But foreign direct investment (FDI), including from China, remains strong.
Glenn Silverman, the chief investment officer at Investment Solutions, noted China’s investment in Africa had focused on “securing long-term supplies of commodities and in African infrastructure”. And he said: “To my mind, the Chinese reserves of more than $3 trillion (R30 trillion) will continue to be recycled into hard assets that secure long-term supply for China.”
Confirmation of this view comes from the China Daily, which reported last month that China’s outward-bound “FDI saw robust gains, expanding by some 20 percent in the first five months of this year to $34.3 billion”. But Silverman argued: “Africa needs to grow its other sectors and anything that propels diversification is healthy and should be welcomed.”
Davies agreed, speaking of a “remix [of] Africa’s growth model, something I regard as both healthy and necessary”.
Investec Asset Management strategist Michael Power had a similar view. He said: “Africa will become less reliant on external demand to stimulate GDP growth and more driven by emerging domestic consumption.”
He said there would be slower growth “perhaps at the margin for a couple of years but at least it will be more balanced in that it will not be so hyper-correlated to Chinese demand for resources”.
He focused on the next stage of Africa’s development. “I think Africa’s industrialisation phase is coming as China’s wage rates rise.” In other words manufacturing bases will be shifted from China to Africa as the cost of Chinese production rises.
Power noted “the growing evidence of Asian investment in African factories – Chinese investment in the Ethiopian leather/shoe business via Huajian, the world’s largest shoe-maker; Honda opening a motorcycle factory and Samsung… a computer assembly plant in Kenya”.