Magazine article African Business

Dollar Weakness Is Strength for African Bourses: After Two Years of Spectacular Bull Runs during Which Some of Africa's Stock Exchanges Outperformed the Best in the World, Growth This Year Will Be More Modest. This Analysis Is by Frank Senyo Dewotor of Databank Securities

Magazine article African Business

Dollar Weakness Is Strength for African Bourses: After Two Years of Spectacular Bull Runs during Which Some of Africa's Stock Exchanges Outperformed the Best in the World, Growth This Year Will Be More Modest. This Analysis Is by Frank Senyo Dewotor of Databank Securities

Article excerpt

The persistent weakness of the US dollar continues to prove a priceless gift for the stock markets in Africa as they consolidate their two-year long bull run in the first quarter of this year. African stock markets outside Zimbabwe posted an average index return of 9% in the first quarter in local currency terms and 8% in US dollar terms.

This compares favourably with an average return of 7.32% in US dollar terms posted by emerging and frontier markets, and 4.55% by the developed markets. Since December 2002, African markets have risen on average by 54.5% in US dollar terms compared to 47.1% by the developed markets and 67.6% by emerging and frontier markets.

During the first quarter, index returns in 13 out of the 19 markets in Africa registered gains averaging 11% in US dollar terms and 9.4% in local currency terms. Ghana, which emerged as the best performing market in the world last year with an index return of 144% in US dollar terms, remains in poll position for the laurel again this year with returns reaching 57% in dollar terms in the first quarter. Ghana is the best performing market in the world so far this year.

The improvement in the economic environment characterised by a sharp fall in inflation from 29% a year ago to 11.3% in February, coupled with a persistent decline in interest rates, historic high foreign reserves and a stable currency, continues to entice investors into Ghanaian equities.

Price earnings multiples in Ghana have reached an average of 18x compared to the historic average of 7x yet the frenzied demand for equities has created a scarcity that is promising to raise equity prices even higher. Traders seem oblivious to the uncertainties which characterise election years in African countries. Ghana's elections are scheduled for December. It may not be too far off the mark to say at this point that the market is on the verge of overheating.

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Nigeria is also another exemplary performer in the first quarter as high crude oil prices have kept investor confidence intact and capacity improvements in the oil sector suggests its quota of oil exports under the OPEC mechanism is likely to rise. The Nigerian stock market has risen 13.7% in local and 13.5% in US dollar terms in the first quarter.

Tunisia also posted a strong index return of 12.9% in dollar terms in the first quarter as it became evident that the country's exports are picking up strongly after two years of poor performance. South Africa and Namibia also registered satisfactory dollar index returns of 6.4% and 6.6%, respectively.

On the downside, the Zimbabwe market, as expected, extended its two year bearish performance and looks certain to set a record as the worst performing market in the world for three years in a row.

Index return in US dollar terms was -84% as the Zimbabwean dollar sank further. The local currency index fell 13.4% in the first quarter. The reason is very obvious--the unfavourable political situation in the country has made it impossible for monetary and fiscal policy initiatives to salvage the beleaguered economy from the doldrums.

FACTORS BEHIND AFRICA'S STRONG PERFORMANCE

There are a number of factors behind the continued upward trajectory of African stock indexes in the first quarter. The most important is the persisting weakness in the greenback, which has provided African governments with a strong impetus to initiate policy reforms.

The weakness has muffled the inflationary pressures of high crude oil prices on African economies. Consequently, inflation has dropped from an average of 9% a year ago to 5.7% in February this year for the markets we tracked (excluding Zimbabwe). Lower inflation has also created room for interest rates to drop. Many African central banks have consequently announced declines in their prime rates in the first quarter and this has dragged down the yields on competing government debt instruments. …

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