When looking at history, politics, and business, we think the stage is set for investors to consider increasing their investment and allocating a portion of their portfolios to the Africa region.
China. The chart below clearly indicates that investors have been rotating money into the US markets as China goes into decline. While these two countries represent the largest economies, are they really the only options for investors to allocate money into? Moreover, if history were to repeat itself, then, if the Chinese markets were to fall into the abyss that some investors are predicting, we think the US markets will dip significantly too, as China did during the Great Recession. Finally, with the S&P and Nasdaq charts reaching a high and social media recently showing some signs of adjustments from sky-high valuations during earnings season, we wonder if there could be a broader market correction on its way.
In our view, China is now moving into the position of becoming a more mature emerging market. Stocks in such markets will tend to be more liquid and subject to broader risks and volatility, as compared to still budding markets like Africa where liquidity and equity coverage is less, allowing for attractive long-term growth opportunities while minimizing extreme risks. We also add that further uncertainty arises from the fact that this is the first major market decline driven by China since the country became a significant driver in the global economy: we just do not know how the government of China will react.
Signs of China falling into decline offered recently include a PMI of 50 showing no signs of growth; slowing flow of imports with a rise of only 0.7% in 2014; and a slowdown in construction businesses related to China at Caterpillar and United Technologies. In such an environment, investors will have to be extra careful on where they invest in China, both in terms of sectors and individual stocks. We argue that, if investors are going to have to take that stance on China, then why not allocate a portion of the risk to beaten down regions like Africa, where active managers are proactive in choosing the best regions and best stocks within them?
Politics loves business, and business loves politics. Now about 6 years after the end of the Great Recession and with Americans adjusted to the “new normal,” President Obama visited Africa last month in July 2015. To us, this action harkens back to 2001 and 2002 when President Bush visited China just as the Recession of 2001 ended, with the US then poised for recovery. Back in 2001 and 2002, investors were not fully aware of the big player that China was about to become. Similarly we note that in March 2006 President Bush visited India, and, since then, India has grown to become a major power in the global economy.
Again, if the past is a prologue to the future, we suspect that President Obama’s open support in developing Africa’s infrastructure suggests that major global businesses will be investing in Africa for the long-term. We also note that, as US corporations have become more comfortable in investing
and developing their businesses in Asian and BRIC regions with less infrastructure and more uncertainty, their commitment to Africa will be firm. With valuations down as the USD strengthens, we think Africa provides attractive valuations and a good entry point for investors.
The views expressed are opinions subject to change and are not investment advice
Nile Capital Management
We Know Africa: From Cairo to Cape Town
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