Cavan Osborne
Old Mutual
Portfolio Manager
After navigating the catastrophic and difficult Covid-19 pandemic, the Russia-Ukraine conflict, and a few debt restructurings, African markets ended 2024 looking stable and ready to get back on the path of real growth. However, things were slightly destabilised when US President Donald Trump and his African-born advisor, Elon Musk, entered the scene.
The expectation was not that Africa would lead in making America great again, but that the US’ biggest trade countries – Canada, Mexico and China – would feel the significant backlash.
Surprisingly, within days of taking the reins, Trump announced an immediate halt to USAID, which he said he saw as wasteful. In his view, these tax funds could be better used to advance US interests.
Several African countries, including Ukraine and Jordan, were the largest beneficiaries of USAID. As a result of this, thousands of people were left jobless as HIV treatment projects across the continent closed, and US citizens, employed by USAID, were repatriated immediately.
Amid this, Africa’s economic growth trajectory will not be stopped.
There are various key African projects underway, which the US will continue to fund as it stands to benefit from them. On 13 March, the US Export-Import Bank approved a $5 billion loan for a gas project in Mozambique. This funding had been delayed under President Joe Biden, but Trump’s agenda is to lower inflation by lowering energy prices. Another project is the Lobito Corridor, the railway line from mineral-rich eastern Congo to the Angolan coast at Lobito.
How it’s playing out in the markets
The US market has seen a correction in the last few weeks. Africa and frontier markets are negatively correlated to the US market, and therefore, it is no surprise that they have been so resilient year-to-date (14 March 2025). Africa, excluding South Africa, is up >12%, while the MSCI World Index is down slightly. The African markets with euro currency links have benefitted from the dollar’s weakness. These include Mauritius, BRVM, and Morocco.
Interestingly, even with the correction seen, developed markets (DM) and emerging markets (EM) are still trading well ahead of the typical PE range.
Given developments in the US and the outlook for higher inflation, we have had to temper our outlook for rate cuts. Still, we do expect African countries to cut rates independently of the Fed’s rate movements. In March, we saw this with Morocco cutting its benchmark rate on the same day the Fed voted to keep rates stable.
We continue to hold our most bullish view on Africa in 10 years. Our argument is centred on lower rates across Africa, which would draw local investors back into local equity markets and support higher valuations and price/earnings multiples. For the past year or two, local African investors have preferred to focus on getting the 15% to 30% returns that local treasuries have offered. But as rates moderate, equities become more interesting again.
Lower rates make equities interesting
While the expectation of the extent of the cuts has reduced globally, we still think there is good scope for rate cuts, as inflation has fallen in many countries and the real interest rates are high. Looking at Kenya, as an example, Treasury bill (T-bill) rates have come back from 17% to 11%, and inflation is running at just 3%. With a real rate of 8%, there is scope to cut rates further, which means equity markets should gain favour at some point.
Another reason for being bullish is that after almost 10 years of underperformance, EM could be well poised to gain favour. We saw EM outperform DM when the economic growth differential widened from 2000 to 2010. The current projections suggest that the economic growth differential between EM and DM is widening again. According to the International Monetary Fund, global growth is projected at 3.3% for 2025 and 2026, below the historical average of 3.7%. While EM are anticipated to grow at 4% this year, in line with 2024, and China is looking to stimulate its economy to 5% growth.
If history holds, EM is set to outperform once again, particularly as the growth forecast in the US is being cut. Frontier markets typically follow (lag) EM by six to 12 months.
Growth outlook is solid
Below are the December 2024 results from the largest holdings in the Old Mutual African Frontiers Fund:
MCB (Mauritius Bank): (6 months) +10%
Sonatel (West African telco): EPS +18%
CIB (Egyptian Bank): EPS +86%
Attijariwafa (Moroccan bank): EPS +16%
Label Vie (Moroccan food retailer): EPS +10%
Our 2025 growth forecast for the fund is 14%, which seems reasonable given the performance from the largest holdings in 2024.
Even after tempering our outlook for lower rate cuts, we are confident of strong returns over the next two years. The strong performance will come from:
PE multiple expanding from 5.3x (driven by EM back in favour and lower interest rates)
Earnings growth of around 14%
Dividend of 7%
An expectation of a benign foreign exchange environment
Below are some possible return scenarios.
In closing, with the current economic landscape, including a growing growth differential between EM and DM, it might be a good time to consider diversifying into EM, especially if you aim for long-term growth. Africa, specifically, offers great value for investors willing to take advantage of its opportunities.