Mrs May has been visiting the three largest economies in Africa this week – South Africa, Nigeria and Kenya. These countries, it seems, are part of Britain’s post-Brexit strategy of becoming a global trading power. What’s behind the new scramble for Africa?
The lady dances…
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At the beginning of this year I wrote extensively on Africa, especially on Kenya where I spent most of January. My upbeat lead article in the February edition of the Master Investor magazine was entitled African Dawn. (Fabulous photography, too – though I regret to say none of it mine.) But, as we all know, this has not been a great year for the emerging markets overall. The MSCI Emerging Markets Index overall is down from a peak of about 1,300 in mid-January to around 1,075 as I write – so down a fairly chunky 17 percent.
That is mostly attributable to the rise of the US dollar given rising interest rates in the USA – but also, so we are told, because much cash allocated to emerging markets has been repatriated back to developed markets. The economic outlook across the developing world, however, is still relatively benign – and some emerging market currencies have done better than others.
Looking at the stock performance of the three countries Mrs May visited this week, plus the other “big” African economy, Egypt, a few things stand out.
| Country | Index | YTD – local cur. | YTD – US$ | YTD – € |
| Egypt | EGX-30 | +1.84% | +1.13% | +6.71% |
| Kenya | NSE-ASI | +1.98% | +4.25% | +9.53% |
| Nigeria | NGSE-ASI | -7.78% | -8.04% | -3.14% |
| South Africa | JSE-ASI | -4.80% | -19.49% | -15.60% |
Source: African Markets (to 17 August 2018).
The Egyptian and Kenyan markets have kept their heads above water while their currencies have actually appreciated. The Nigerian market is down nearly eight percent on the back of renewed political and security uncertainty. And foreign investors in the South African market have been badly hit by the slide in the Rand – itself the product of growing doubts about new President Cyril Ramaphosa’s economic policies.
Brave investors who favoured the smaller African stock markets this year will be feeling pleased with themselves. The Malawi market is up 44.84 percent (44.44 percent in dollar terms) and the Tunisian market is up 32.89 percent (17.94 percent in dollars). Last year’s star performer, Ghana is up a more modest 14.08 percent (but just 6 percent in dollars).
(I did say a good word about Malawi in my February piece – so if there are any grateful punters out there, mine’s a case of Domaine de Cantarelle Coteaux Varois.)
As I wrote in February, Western investors carry a lot of negative sentiment towards Africa which we should consciously jettison. We tend to think of the continent as disaster-prone, universally poor and irretrievably corrupt. This is a travesty. Most North African countries enjoy a level of life expectancy equivalent to that of Europe 30 years ago. The proportion of children in full-time schooling is probably where it was in the UK two generations ago.
Ever since most African countries gained their independence some 60 years or so ago (which is not even a human lifetime), they’ve expanded their infrastructure progressively. And child mortality rates have been reduced with astonishing rapidity. In Rwanda, for example, child mortality has been reduced from 114.6 deaths per 1,000 live births before the age of five in 2005, to 38.5 in 2016. That metric is still too high – but it represents astonishing progress. Rwanda also has a literacy rate of nearly 80 percent (and 89 percent of girls attend primary school).
Only 60 years ago (when I entered the world) China, India and South Korea, which have all experienced economic miracles since then, were far behind where Africa is today. This week a plucky lady of nearly 62 joined in the dance with some lithe South African children. A little stiffly, perhaps – but her sporting gesture reminded us that Africans have much to dance about…
Changing outlooks
Back at the beginning of this year the consensus was that the European economy had recovered, America’s had probably peaked and the emerging markets looked fragile. As I have argued in these pages before, the consensus view is normally wrong. (We were told that Brexit and Trump would send the markets sky-diving…)
We now know that the eurozone economy (that is a more accurate term than the European economy, since the eurozone is a de facto pseudo-state) stalled over Q1 and Q2 this year. As I discussed earlier this month, the French economy grew by a paltry estimated 0.2 percent in Q2 – so the lumbering UK has now leapfrogged back into the top-tier of the European growth league with its pitiful 0.4 percent! The export-led eurozone recovery of 2017 has not been sustained.
Some Europeans are blaming President Trump’s trade war for the slow-down – though it started well before the present round of tariffs and counter-tariffs. It is more likely that the uptick in eurozone growth last year was facilitated by an exceptionally benign world economic picture characterised by an upsurge in world trade – partly powered by much stronger growth in emerging markets.
Moreover, the European Central Bank (ECB) announced last month that it would wind down its programme of QE (bond-buying) by December. Inflation in the eurozone is now narrowly above two percent, partly due to higher energy prices – so the ECB has fulfilled its target. This bodes an increase in euro rates in the short to medium-term.
In the US the Trump administration’s tax reforms and its aggressive trade policy have confirmed the belief that US interest rates are heading up – and the dollar has strengthened precipitously.
Cold Turkey
The summer shockwaves through emerging markets had their epicentre well north of the African continent. It was Turkey – a transcontinental country on the European periphery – which caught a cold.
Some economists have been asking whether Turkey is the canary in the emerging markets coalmine. Exactly 20 years ago the world economy was convulsed by the Asian Debt Crisis. First the Thai Baht fell out of bed and then the Russian Rouble collapsed, leaving both of those countries unable to service their largely US dollar denominated debt piles. This whipped up fears of “financial contagion” which led first to a collapse in emerging market bond markets (the so-called flight to quality) and then to a massive sell-off in global equity markets.
Before the Asian crisis erupted there had been a period of sustained growth throughout the developing world which had pumped up asset prices to absurd levels. The prices of high-end apartments in Bangkok and Kuala Lumpur are lower even today than they were 20 years ago! The crisis caused capital flight with massive impact on the currency markets. The Thai baht went from just above 30 to the pound to nearly 80; the Malaysian ringgit went from three to the pound to nearly eight!
This summer the Turkish lira has plummeted losing about 35 percent of its value year-to-date. This has driven up domestic inflation – now 16 percent – which, in a kind of feedback loop, weakens the currency further. But Turkey’s growth numbers are enviable: having expanded by 7 percent in 2017 the Turkish economy is still set to grow by 4 percent this year. Turkey’s problem, however, is the same as Thailand’s in 1998 – the cost of servicing its dollar debt is surging as the mighty greenback rises in value.
President Erdoğan, of course, blames new American tariffs – which clearly don’t help. (He should have released the American pastor who has been detained on trumped-up charges.) But the impact of these tariffs is quite marginal. The real problem is President Erdoğan himself and his authoritarian instincts – which now threaten to compromise the independence of the country’s central bank, thus spooking the markets. (He really does have much in common with Mr Trump.) Under his presidency (he became the French-style head of state and government in August 2014) Turkey has transitioned from EU candidate-member to oriental despotism.
To be fair to Mr Erdoğan (whose name means brave warrior), the Turkish economy has nearly tripled in size since he first became PM in March 2003, riding a wave of consumption and construction-led growth. There is a spanking new $11 billion motorway between Istanbul and Izmir and a shiny high speed train link is under construction between Istanbul and the capital, Ankara. And so on. But the national debt has ballooned accordingly.
Argentina’s economy is also in crisis (again). Yesterday (30 August), the country pleaded with the IMF to release $50 billion of new funding. The Argentine peso has lost more than 40 percent of its value against the US dollar this year and inflation is rampant. Its interest rates are at around 40 percent – and yet its bonds are almost worthless. This, a country which issued a 100-year dollar denominated bond last year – how quickly market sentiment changes.
But, overall, emerging markets are not as dependent on dollar funding as they once were. In my view, Turkey and Argentina are not canaries – they are what they always have been. This is not 1998. We ought not to look at emerging markets as one coherent thing. Africa is special because most countries are not heavily indebted; but within Africa each state is different.
The grand tour
Last week, President Donald Trump watched Tucker Carlson Tonight on Fox News and got angry. The president fired off a tweet in support of South Africa’s white farmers who face having their land seized without compensation. Amazingly, it seems to have had some impact. On Tuesday, South Africa’s ruling party, the African National Congress (ANC) withdrew “for further consideration” a bill that would have authorised uncompensated land confiscations.
There have been no farm seizures to date, but the issue has unsettled the uneasy settlement that Nelson Mandela forged back in 1994 when the apartheid regime was dismantled. President Cyril Ramaphosa unseated Jacob Zuma in a palace coup back in February, promising a cleansing of the Augean stables that is South African political life. Everybody knows that corruption is rife. The land reform issue has muddied the waters and drawn attention away from the fundamental need for structural reform in the country.
Mrs May was diplomatic – she said nothing about the proposed land seizures in Cape Town. She just said that her trip was intended to deepen and strengthen old partnerships. South Africa’s economy is the second largest on the continent after Nigeria – which has a much larger population (it has 57.7 million people as compared with Nigeria’s 191 million).
She met Nigerian President Muhammadu Buhari in Abuja on Wednesday. Although Nigeria is still Britain’s second trading partner in Africa, British imports from Nigeria, particularly crude oil, have fallen over the last five years while exports to Nigeria have risen. Mrs May offered Nigeria help with its delicate security situation and proposed measures to reduce people trafficking.
The Prime Minister then met President Uhuru Kenyatta in Nairobi on Thursday (30 August) just three days after he had discussed trade with President Donald Trump at the White House. Mrs May announced the establishment of a joint cyber-security centre in Nairobi. This was supposedly focused on the anti-paedophile drive but, of course, it has implications for anti-terrorism too.
To put the task in perspective: in 2015, total trade between Africa and the UK amounted to $36 billion (£28 billion). But the figure for the EU as a whole was $305 billion. In the same year, trade between China and Africa totalled $188 billion; and between the USA and Africa it was $53 billion[i]. There is a mountain to climb but it is not unrealistic that the UK could overtake the level of US trade if African products were given favourable treatment post-Brexit.
Meanwhile in Egypt…signs of progress
It is s a commonplace that Egypt since the fall of Hosni Mubarak and the Arab Spring of 2011 has been un-investible. The tourist trade, Egypt’s largest source of foreign currency, has been shattered. But with General Al-Sisi – recently re-elected in an admittedly contested ballot – firmly in the saddle, and pursuing a pro-business agenda, the country may be worth another look.
Egypt’s economic reform programme is changing the country. Regulatory reform, the free float of the currency and investment in infrastructure are opening up new opportunities for the private sector in this market of nearly 100 million people. Earlier this week, The Banker magazine explained how these changes are improving the business environment and opening up the country to international investors[ii].
Mrs May might well be heading there soon.
Emerging Markets and the global cycle
As an asset class, emerging market stocks were traditionally regarded as growth stocks. The business cycles of emerging markets were deemed to be out of sync with that of mature markets – and therefore allocation to emerging markets was a sensible diversification strategy. But do we still believe in the idea of the business cycle – the classical idea that boom is followed by bust approximately every ten years?
The economic textbooks teach that there are four stages to an economic cycle: recovery, boom, downturn and recession of approximately equal duration. They also teach that the cycle is a kind of recurring wave with inflation and interest rates following the cycle – rates rise in booms and fall in recessions. In practice, economists know that historically (at least in the modern period since 1945) recoveries have lasted much longer than recessions. There is some evidence also that, as modern economies shift from manufacturing to services, so recoveries get longer and recessions get shorter. In a service-based economy there is less of an effect from the build-up of inventories as demand reduces, requiring production lines to be halted. Services, in contrast, cannot be over-produced.
But as interest rates finally recover from near-zero levels in the decade after the financial crisis of 2008 – caused by a systemic global banking crisis, let us recall – some economists fear that the global economy could be tipped into recession because the overall level of global growth is much lower than in the first 50 years after WWII.
The main risk factors are the huge imbalances in the global economy. A build-up of debt in some emerging markets and in China in particular is being accompanied by an increase in the US budget deficit. (Admittedly, President Trump’s main focus is to reduce the trade deficit – even as the budget deficit rises inexorably.) The eurozone is sustained by a weird system of unsecured overdrafts between the central banks of the participant nations called Target 2. Under this system, Germany’s Bundesbank builds up ever greater claims on the central banks of the deficit nations of Southern Europe. Japan is still battling deflation – the effect of a declining population.
Advantage Africa
What Africa has going for it is that it has huge natural resources plus fast-growing human capital. Many African countries are experiencing rapid economic growth – Ethiopia is predicted to grow by 8.5 percent this year. And Britain, once one of the colonial masters of the continent – hence most of its 1.2 billion souls have English as a second language – is well placed to participate in Africa’s rise.
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Countries like Kenya have a strong comparative advantage in food production thanks to benign climate and soil conditions – plus a large supply of willing labour. It is also the world’s third largest producer of cut flowers. As The Spectator reports this week[iii], the EU for many years has kept much African-produced food out of Europe through quotas, punitive tariffs and other protectionist non-tariff barriers – such as the EU’s blanket ban on GM crops on which many African farmers are dependent. Significantly, an EU-Africa trade deal is not even on the table.
On 28 August British Prime Minister Mrs May announced that she wanted Britain to be the G-7’s leading investor in Africa by 2022. That would mean overtaking France, whose young President has already barnstormed through most of Francophone Africa. That is a laudable ambition – though it would probably not be realistic to try to overtake China on the continent. The Chinese, as I reported from Kenya earlier this year, are ubiquitous there with a massive new railway project linking Mombasa on the Indian Ocean to the capital Nairobi and thence to the Ugandan border. The Chinese don’t talk about “aid” in Africa – they invest and lend for mutual advantage.
Next week the Forum on China-Africa Cooperation will take place in Beijing. Dozens of African heads of state are expected to attend and China may offer new trade and finance deals. Some China-watchers think that the country is using soft loans to buy influence in the continent.
A move away from the obsession with “aid” – which infantilises its recipients – towards trade is welcome and long overdue. Many British businesses have prospered in Africa over many years – originally from the possibilities for exploitation offered by the colonial system. I was horrified to learn when I was in Kenya that under British rule only white people were allowed to own coffee plantations: racism, pure and simple. But since independence, many British companies from BP (LON:BP) to Delekoil (LON:DKL) have made money in Africa by doing mutually profitable deals. Win-win.
If we want to benefit our African friends we should forget the charity racket and get on with investing wisely in African businesses. I’ll offer some more specific targets shortly.