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The Big Picture: Steyn expects strong earnings growth in Africa this year

Friday, February 11, 2022

André Steyn
B. G., Opalesque Geneva:

An Africa equity-focused fund manager believes that it pays to bet on Africa's earnings growth.

Steyn Capital Management, an African and frontier markets-focussed equities investor located in the Winelands surrounding Cape Town, South Africa, has been investing in African markets since 2009. It manages more than US$700m in a South African long/short fund, as well as pan-African and global frontier markets long-only funds.

The Steyn Capital Africa Fund, a value-oriented long-only fund that invests in Africa (ex. SA) equities, returned 34% in 2021 and 90% since inception in September 2011. Almost all of the portfolio performance was driven by earnings growth that year.

The Steyn Capital SNN QI Hedge Fund, a value-orientated long/short portfolio investing in South African equities that follows a bottom-up stock selection approach, returned 51% in 2021. It has annualised 17% since its May 2009 inception.

CEO André Steyn tells Opalesque about opportunities in Africa, his outlook, and changes in investor sentiment.

Opalesque: How did African equities fare in 2021? How has your portfolio developed?

André Steyn: African equity markets had a respectable year in 2021, with the average of three pan-African indices that we track advancing by 11.3%. Our own Africa fund returned 34.17% for 2021, handily beating the indices.

We observed a resumption of earnings growth from African businesses, with the weighted average operating earnings of the companies in our portfolio advancing by 29% during the year. This earnings increase drove almost all of our fund's performance during the period, meaning that our portfolio is still valued at only 5.4 times operating earnings, which is close to a decade-low valuation.

Opalesque: What opportunities are you currently targeting?

André Steyn: We are seeing most opportunity in consumer stocks, which have been out of favour but are obvious beneficiaries of Africa's youthful demographics and rapid urbanization, which we believe will result in strong demand growth for many years to come.

We are also finding interesting investments in telecoms with continued growth in voice and data, as well as unrecognized mobile money franchises. Across Africa, a number of telecoms have been compelled by local regulators to list their businesses on a local exchange, sometimes leading to very interesting investment opportunities.

Opalesque: What is your macro-economic outlook for the region?

André Steyn: Higher resource and agriculture prices and a resumption of tourism will be a boon to most African markets we are active in over the coming year. Resources and agriculture form up to a quarter of GDP in Africa, a figure up to ten-fold higher than is most developed markets. The oil price is 80% higher than a year ago, copper is a quarter more expensive, cobalt and coffee have both almost doubled, and Tanzanian tourist arrivals are up 225% to pre-Covid levels.

If these factors persist, and we think they will, we will see strong earnings growth in 2022 from many African companies.

Opalesque: Have you observed any shift in investor sentiment towards Africa? What is your outlook?

André Steyn: We have been surprised that African equities have remained so loathed given the strong earnings growth, as well as the obvious demographic tailwinds (you don't need to be a rocket scientist to work out that demographics is going to be a headwind for much of the world over the coming decades, while Africa stands out as a major beneficiary of an increase in working-age population).

We believe the reason is once again to be found in competitors shutting down and selling down their portfolios indiscriminately. The 2020 year saw the exit of three African investment firms with a three-decade track record, while the 2021 year saw the exit of another two African investment firms with roots stretching back to the 1990s. One of these African managers shut down his firm to relaunch as an ESG manager of ETFs, which is the polar opposite of active investing in African equities. We would call that a contrarian indicator.

Recently, we have seen some inbound interest into Africa from high-quality investors, many of whom are cognisant that the very strong performance from developed markets, especially the US, has made those markets expensive, reducing prospective returns.

The table below illustrates that the S&P500's 322% return over the last decade has been driven more by multiple expansion, rather than earnings growth, while the reverse is true in Africa. We believe that this sets up African equities markets for strong prospective returns.


The Steyn Capital Africa Fund's top five performance contributors for 2021 were Bralirwa, a Rwandan brewer, MTN Ghana, a telecommunications company, Guinness Nigeria, a brewer, Tanzania Portland Cement, and British American Tobacco Kenya. The top five performance detractors were WPP ScanGroup, an advertising business, Tanzania Breweries, Eastern Company, a tobacco manufacturing company, Nigerian Breweries, and Alexandria Pharmaceuticals. The fund made a new position in Nestlé Ivory Coast and exited its position in Onatel, a mobile business.

At the end of the year, the fund held 97% of its capital in 18 positions. The largest geographical equity exposures were Egypt (19%), Tanzania (18%), Nigeria (16%) and Rwanda (12%).

The South Africa hedge fund held 101% of the capital in 34 long positions and -31% in 23 short positions, for a net market exposure of 70%. The portfolio has a beta adjusted market exposure of approximately 30%.

Watch Opalesque.TV's VIRTUAL MANAGER VISIT video with André Steyn in Cape Town:

Related article:

21.Jun.2021 The Big Picture: Why should investors allocate to Africa

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