2016 In Review Part 2: How Did Africa and the Middle East Perform?


Welcome to our year-end review of how equities in frontier markets performed around the world in 2016. We covered Latin America and Asia in Part 1, which can be found here.

In part 2 we now look at Africa and the Middle East. Africa had a rough 2016, including having the worst performing frontier market globally. The Middle East fared better, gaining a small amount on the year.


Africa’s frontier stock markets largely struggled in 2016. In the 13 stock markets that we track, they were down an average of 6.44% in local currency terms, and down almost 9.6% in USD terms. Only 2 of the 13 markets were up on the year, while 8 of the markets were down more than 10%.

The poor performance is despite the fact that we normally associate African economies as reliant on primary industries or natural resources. Given the massive gains seen in Latin America on the back of the commodity rebound in 2016, it is surprising to see Africa do so poorly. Part of the reason is that most of the major mining companies which have surged this year are not local ones, even if they have extensive operations in Africa. So while region-leading Namibia has international mining companies cross-listed on its exchange, many of the other African markets do not.

Best Performing Market: Namibia

Namibia, which we covered in an investing guide earlier that can be found here, was a big beneficiary of the rebound in mining stocks this year. It managed to gain over 22% in local currency terms, and another 34.5% in USD terms as the currency managed to appreciate over 10% after a big depreciation in 2015. As a country where 4 of the top 5 exports are minerals, and where a lot of international mining companies are cross-listed, the market’s returns are a bit distorted by them. However, even large local stocks did well with FNB Holdings, the largest local bank, up 10%, and Namibia Breweries up almost 25% on the year.

Company to watch: Namibia Breweries (NBS)

Namibia Breweries is the third largest local company listed on the Namibian stock exchange, but is by far the largest brewery in the country with a near monopolistic market share. It produces and distributes international brands like Heineken and Guiness, and also local beers like Windhoek Lager. While revenues have been stable, costs have been reduced, pushing earnings per share 43% higher in 2016. The stock trades at a PE ratio of around 22 even after a tremendous run in 2016.

Worst Performing Market: Nigeria

Not counting Venezuela, Nigeria has the unfortunate distinction of being the worst performing frontier stock market in 2016 with a return of -41% in USD terms, barely edging out Myanmar. The local market actually didn’t too badly, down around 7% YTD, but the Nigerian Naira was the 4th worst currency (out of 154 currencies tracked by Bloomberg) in 2016 with a return of almost -37%. Unfortunately, this is the official currency rate – the black market has the Naira down almost 59% on the year.

Nigeria has faced a dollar shortage all year that has impacted the entire economy. Oil’s fall in 2015 devastated the Nigerian economy, and after holding the currency at around 200 Naira per USD since March 2015, the government was forced in June 2016 to move back to a free float that caused a one day depreciation of about 22%. While the Naira is now  officially at a rate of 315, it’s trading even worse on the black market at around 485 currently. Foreign investors have fled the market, GDP growth is negative, and inflation is over 18% with relief not yet on the horizon.

Company to watch: The Nigerian Naira (NGN)

We’re going to cheat a little by focusing on the currency since this is the main factor impacting any investment in Nigeria right now. While oil is at the year’s highs and well off the lows seen in January, the economy is still in a recession and liquidity just isn’t there for the currency. The wide gap between black market rates and official rates, even after the large devaluation this year, is a huge warning sign that there could be further pain in the currency going forward. Capital controls have also increased with threats of jail time now, so it is hard for foreign investors to realize any potential gains on the market.

For those still looking for potential companies, it should be pointed out that while the Nigerian All Shares Index consists of 171 companies, Dangote Cement (DANGCEM) has a weighting of 31.5% of the index, Nigerian Breweries (NB) has a 12.5% weighting, and Guaranty Trust Bank (GUARANTY) has a weighting of over 8%. In essence, just 3 companies account for over half the weighting of this index, and 144 of the companies have a weighting of under 1% of the index. This is a very top heavy market.

Middle East

The Middle East has been very stable in 2016, with the majority of markets we track having an absolute return of under 5% on the year. The rebound in oil has not been reflected in local stock markets, and since most of the currencies are heavily controlled (eg. Saudi Arabia’s currency is basically pegged), even the currencies have not benefited from the move.

The biggest news in the region this year was Saudi Arabia opening up the stock market to foreign investors by the beginning of next year. Saudi Arabia was also in the news for announcing that it would soon IPO a stake in the world’s largest oil company, Saudi Aramco. But aside from the headlines, most of the larger developed countries in the Middle East moved very little this year.

Best Performing Market: Morocco

Morocco was the best performing market in the Middle East and it wasn’t even close. We covered how to invest in Morocco earlier here, and the Casablanca Stock Exchange has been doing so well that it is planning to list itself and sell a stake to the public.

The rebound in commodity prices has not been a driving factor in Morocco’s case, as even though they are the largest exporter of phosphates in the world, the main company is not listed on the exchange. Instead, strong earnings growth coupled with political stability and investor friendly policies have buoyed the market.

The largest stocks on the exchange have all rocketed higher this year even though they are in separate industries. Maroc Telecom, which accounts for 20% of the MASI All Shares Index, is up over 28% YTD. Attijariwafa Bank, which accounts for almost 16% of the index, is up almost 19% YTD. LafargeHolcim, a cement company with about a 13% weighting in the index, is up over 55% YTD!

Company to watch: LafargeHolcim Maroc SA (LHM)

Eyebrows have certainly been raised over Lafarge’s incredible run-up this year. It is currently trading at all-time highs above levels seen in 2008 and 2010, with a P/E ratio of 27.5. Almost 40% of its operating income comes from the Middle East, and the stock rallied on revenues increasing 27% and net income jumping 49% in the first half of the year. But the performance is beginning to meet with cynical analysts who believe that valuation no longer looks as attractive, and a number of research analysts have reduced their recommendations on Lafarge over the past couple months.

Worst Performing Market: Egypt

The trend of falling currencies crippling returns from the stock market continues in Egypt, where the Egyptian pound (EGP) has been devalued twice in 2016, the most recent in November. During that week of November, the EGP went from 8.88 to 1 USD to 17.50 to 1 USD; it started the year at 7.83 to 1 USD. Except for Venezuela, the Egyptian pound was the worst performing currency in the world this year.

Inflation is rapidly approaching 20% yoy, forcing the central bank to raise the policy rate by 3% to 14.75% during the devaluation. Egypt still runs a current account deficit and as expected, the supply of USD has been constrained. The devaluation was a step in the right direction and a necessary requirement to continue receiving money from the World Bank and IMF. However, the EGP continues to depreciate and has hit new lows recently of 18.60 EGP to 1 USD, and news that Saudi Arabia suspended oil shipments did not help matters.

But with the full float of the currency, the companies that stand to benefit the most will be ones with non-EGP revenues  outweighing EGP denominated costs.

Company to watch: Sidi Kerir Petrochemicals Co (SKPC)

SKPC is a chemicals manufacturer that produces ethylene and polyethylene, the only such company in Egypt. Since it produces a global commodity that is quoted in USD, its revenues are almost completely insulated against the depreciation in the Egyptian pound, while its costs are almost 60% in local currency. Strong demand for its product also means the devaluation will hardly impact its revenues overall, meaning that SKPC is the big winner from the recent devaluation.

The stock is up 53% YTD, 46% of which has been since the devaluation in early November. Analysts have jumped on-board with 8 out of 10 recommending a buy with the other 2 calling for hold.

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