African frontier stock markets can behave very differently from developed markets and even from broader emerging markets. The transcript argues that sub-Saharan African local stock exchanges are often less correlated with global markets because they are cash-driven, lightly leveraged, dominated by local investors, and built around basic industries that still have long growth runways.
The focus is on sub-Saharan Africa excluding North Africa and South Africa. The strategy discussed is not to buy a broad Africa ETF listed in London or New York, but to invest directly through local stock exchanges in dominant local companies such as breweries, banks, telecoms, mobile-money businesses, cement companies, and consumer staples.
Why African frontier markets behaved differently in 2022
Many global stock markets had a poor 2022, especially developed markets affected by rising interest rates. African frontier markets were less affected.
Several reasons are given:
- many African economies still had low- to mid-single-digit GDP growth,
- local stock markets remain linked to basic economic growth,
- valuations were already low,
- these markets did not benefit as much from years of falling global interest rates,
- there is little leverage in the system,
- most investors are cash buyers,
- local equity investors are often wealthier elites whose behavior changes less from year to year.
Because there is little margin debt or forced selling, falling global asset prices do not necessarily create the same liquidation pressure seen in Western markets.
The downside is that there is less speculative upside in normal times. The upside is that there may also be less forced downside when global markets sell off.
Local African equities versus Africa ETFs
The transcript argues that broad Africa ETFs often do not reflect the real opportunity in local sub-Saharan African markets.
The fund discussed invests directly in local markets through brokerage accounts across multiple African exchanges. This allows exposure to companies that may not appear in offshore ETFs.
The approach is focused on local blue-chip companies that dominate their markets and generate strong returns on capital.
The main sectors are:
- financial services,
- mobile phones and telecoms,
- mobile money,
- breweries,
- consumer staples,
- cement and other basic industries.
The argument is that operating a private business or managing property remotely in Africa can be difficult. Investing in dominant listed companies can be a cleaner way to access growth while professional managers handle local operational challenges.
Tanzania as the largest allocation
Tanzania is the fund’s largest allocation.
The fund’s rule is that no more than 50% can be invested in one country on a cost basis. Tanzania was close to that limit, at about 48.6% on cost. Because the market rose, Tanzania became about 58.4% of the fund by market value.
The allocation is described as bottom-up rather than a top-down bet. The manager found enough good businesses in Tanzania and considered the macro environment more attractive than in several other African markets.
The reasons for Tanzania exposure include:
- favorable macro conditions,
- no major parallel foreign-exchange system at the time discussed,
- local blue-chip businesses with attractive valuations,
- limited foreign investor competition,
- strong local growth potential,
- small market size that larger funds may ignore.
Tanzania is not presented as risk-free, but it is viewed as more manageable than markets facing severe currency or capital-control issues.
Tanzania Breweries as a case study
The largest holding discussed is Tanzania Breweries, the dominant brewery in Tanzania.
It is a subsidiary of AB InBev through the former SABMiller business. It has around 80% market share.
The investment case is based on:
- dominant market position,
- young demographics,
- around 1.5 million people reaching drinking age each year,
- strong operating efficiency,
- high return on equity,
- no debt,
- net cash balance sheet,
- reasonable valuation,
- dividend income.
The company is described as one of the most efficient brewery operators in Africa. Four of the top five most efficient African breweries in the AB InBev group are said to be in Tanzania, with the fifth in Uganda.
Valuation details discussed:
| Metric | Approximate figure |
|---|---|
| Return on equity | Low 20% range |
| Entry valuation | About 10x earnings |
| Dividend yield | Around 5% |
| Debt | Debt-free / net cash |
| Growth | Double-digit top-line growth, faster EPS growth |
The company is not described as extremely cheap, but as a high-quality business at a reasonable price.
Block trades and market quirks
A major advantage of investing locally is understanding exchange rules and market structure.
In Tanzania, some large companies have two practical prices:
- a retail market price on the exchange,
- a block-trade price for larger transactions.
For Tanzania Breweries, the exchange price may not move because the amount of stock required to change the board price rarely trades. As a result, a sanctioned block market exists where investors with at least 200 million Tanzanian shillings, about $85,000, can buy or sell larger blocks directly.
These blocks can trade at a discount when foreign investors exit Africa and need liquidity.
The fund built much of its Tanzania portfolio by buying blocks from investors moving in the other direction.
This is presented as an example of why local knowledge matters. A manager sitting in New York, London, or Chicago may not be as involved in the practical details of how shares actually trade on African exchanges.
Main risks: currency and politics
The two biggest macro risks are:
- foreign-exchange risk,
- political risk.
For foreign investors reporting in U.S. dollars, currency depreciation can erase local equity gains.
The manager tracks indicators such as:
- balance of payments,
- external borrowing,
- foreign-exchange reserves,
- import cover,
- sustainability of the exchange rate,
- foreign debt structure.
Tanzania may eventually depreciate, but the transcript says the near-term risk looked manageable compared with more stressed markets.
Political risk also matters, although the transcript notes that some Western countries now look less stable than they once did.
Ghana: strong company, weak currency
Ghana is used as a warning about currency risk.
The fund had invested in MTN Ghana, the leading mobile phone company. The company performed well operationally, with earnings per share compounding rapidly.
However, the Ghanaian cedi collapsed. The fund’s Ghana exposure fell from just over 12% on cost to just under 5%, mostly due to the exchange-rate move.
The company’s earnings growth roughly offset the currency decline in U.S. dollar terms, leaving the position around flat rather than strongly profitable.
Ghana’s problems are attributed to government borrowing and spending. The country has gold, cocoa, and hydrocarbons, but the government borrowed heavily based on expectations of future revenue. When markets questioned whether the debt could be repaid or rolled over, the currency and debt situation deteriorated.
The transcript contrasts this with Tanzania, which had more bilateral and development-institution borrowing rather than outstanding Eurobonds.
Nigeria: almost uninvestable
Nigeria is described as very difficult for foreign investors because of its parallel foreign-exchange system and capital controls.
If a foreign investor sells Nigerian shares for naira, they may need to join a queue at the central bank to obtain dollars. The waiting time discussed is around nine to 12 months.
Because of this, the fund holds only a small Nigeria allocation of about 3%.
The recent election is mentioned as a potential catalyst, but the outcome is uncertain. The transcript says Nigeria is not a market to rush into while capital controls and parallel exchange rates remain a problem.
West African regional exchange
The fund has about 8% exposure to the West African regional exchange, covering francophone markets such as Côte d’Ivoire, Senegal, Burkina Faso, and others.
The main holding discussed is Sonatel, the Senegal-based West African telecom subsidiary linked to Orange.
Sonatel is described as a high-quality telecom and mobile-money business with strong returns on equity and a healthy dividend.
The entry price was around 11,400 West African francs. The net after-tax dividend rose to 1,500 francs, implying a yield of nearly 15% on entry cost.
The limitation is that there are not many large, liquid, high-quality listed companies on the regional exchange that can meaningfully move the fund.
The West African franc is linked to the euro, which creates a different cycle from anglophone African countries with their own currencies. This can help diversify regional exposure, although the euro itself can move against the U.S. dollar.
Kenya: good companies, weak sentiment
Kenya is described as disappointing but potentially attractive.
The stock market is in a bear market, and local investors are disillusioned. Many prefer treasury bills, bank accounts, or real estate rather than equities.
Kenya faces issues similar to Ghana, including foreign debt, currency pressure, and some foreign-exchange scarcity. A parallel exchange rate has started to appear, although the situation is not described as as severe as Nigeria.
The official rate discussed was around 127 Kenyan shillings per U.S. dollar, but investors may need to accept around 134 or 135 to get money out.
This creates a practical problem for foreign investors and real estate owners. A person may legally sell an apartment or shares, but then struggle to convert local currency into dollars at the official rate.
The fund handled one Kenyan opportunity tactically by selling an existing local position to obtain shillings, then using those shillings to buy a better-value block, rather than sending fresh dollars into the country.
The transcript suggests Kenya may not be in as much trouble as markets fear. The United States appears to be paying more attention to Kenya, and this may help around future financing needs, including a large Eurobond repayment.
Rwanda: small but high-quality exposure
Rwanda is about 9.5% of the fund.
The market is very small and illiquid, with shares trading rarely. The fund owns positions in:
- BK Group, the leading bank,
- Bralirwa, the dominant brewery and Coca-Cola bottler.
BK Group is described as accounting for more than half of the financial industry.
Bralirwa is a Heineken subsidiary and dominates beer and soft drinks in Rwanda. It may have 80% to 90% market share, depending on how imports and informal trade are counted.
Rwanda’s currency has weakened, but gradually, at around 3% to 4% per year, which is described as manageable.
The fund was able to buy positions because a foreign investment fund wanted to exit. In illiquid markets, meaningful positions often only become available when another large holder needs to sell.
Corporate governance and multinational subsidiaries
One reason many holdings are subsidiaries of large multinationals is governance.
Examples include:
- AB InBev-linked Tanzania Breweries,
- Heineken-linked Bralirwa,
- Orange-linked Sonatel,
- MTN Ghana.
These businesses may have local auditors as well as oversight from international parent companies and global auditors. This adds a layer of protection for minority investors.
The fund did not deliberately set out to own multinational subsidiaries, but the investment screens favored dominant companies with strong returns on capital and good management. Many of those turned out to be subsidiaries of global groups.
Geopolitics and Africa
Africa is described as increasingly important in global geopolitics.
China had been very active in Africa over the past 15 to 20 years, though it has stepped back somewhat since COVID. The United States appears to be increasing its attention again, especially in Kenya.
High-profile U.S. visits and diplomatic appointments are mentioned as signs of renewed interest.
Tanzania may benefit from being non-aligned. It maintains relationships with many countries and accepts investment from different sides, including China, the United States, Turkey, Iran, Cuba, and others.
A Turkish company is building a high-speed railway in Tanzania, showing that investment is coming from multiple sources.
The transcript argues that countries such as Tanzania can benefit from great-power competition because they are willing to work with many partners.
Investment approach
The investment approach is selective and long-term.
The goal is to compound in U.S. dollar terms at around 14.5% to 15% per year, roughly doubling every five years if possible. Because currencies can depreciate, local-currency returns must often be higher than that to achieve the U.S.-dollar goal.
The strategy is not to chase every African market. It is to own dominant, profitable, cash-generating companies in different countries and sectors.
The portfolio is diversified because any African country can suffer a currency crisis, political shock, debt problem, or liquidity freeze. Ghana’s currency collapse is an example of why diversification matters.
The view is that Africa often moves “two steps forward, one step back.” A country or position may blow up at any time, so the fund relies on a spread of countries, currencies, sectors, and company types.
Practical takeaway
African frontier markets can provide uncorrelated exposure and access to basic industries with long growth runways. But the risks are real: currency depreciation, capital controls, political risk, foreign-exchange queues, weak liquidity, governance problems, and country-specific debt crises.
The strongest approach discussed is not broad ETF exposure or remote private business ownership. It is selective local-market investing in dominant companies with strong returns on capital, dividends, professional management, and enough diversification to survive inevitable country-level setbacks.
