Emerging Africa LTD

Africa Investor
January - April, 2005

Expert Insight

As stock markets emerge from the shadows, Thomas Mims illuminates a canny investor's dream.


Thomas Mims

   Over-achieving yet undervalued publicly-traded companies of Africa are waiting to be discovered by global investors. Africa receives five per cent of foreign portfolio investment into developing countries. This in light of the fact that, of the world's top ten performing stock markets, five of them are in Africa.
   African stocks also exhibit potential for fantastic growth in equities value. Research shows that economies fare best where capital is inexpensive, plentiful and fairly allocated. The "democratisation of capital" is a powerful force that feeds upon itself as healthier economies attract more capital by which to grow healthier.
    Analysis of valuation measures of African markets relative to the rest of the world illustrates the room for growth. For instance, the average P/E (price earnings) ratio for African stocks is less than 25% of the historical P/E ratio for the S7P 500. The low African ratio results from generally poor levels of information and data from the African capital markets, and false impressions concerning the potential for profit existing in African equities. An adjustment up to only 50% of the

S&P P/E ratio would imply 200% growth in African stock values.
A fraction of the size, with half the population and raw materials and natural resources of Africa, the US has a stock market capitalisation 50 times greater than that of Africa. Several global companies have a market capitalisation worth more than the total market capitalisation of all the stocks traded in Africa. The value of US stocks represents 200% or more of its GNP while African stock value is only 90% of GNP. Were African stocks to "reprice' to the US level of GNP to market capitalisation, the ratio would imply an increase in value of over 150%.
Africa trades five billion shares per year (excluding South Africa), while Nasdaq can trade five billion shares in one day. To improve the prospects for growth and maturation of the African capital markets there is a need for: lower costs of transacting; more liquidity and depth; presentation of good transparency; less fragmentation of markets; improved acess to information and data; greater involvement of financial intermediaries to create more products, such as ADR/GDRs and in privatisation; open and closed end funds; unit trusts.

Thomas Mims is founder and CEO of Emerging Africa.

January - April 2005 / 23

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