So far in 2016, no market has been spared the toxic blend of plunging oil prices, global growth headwinds and policy uncertainty. For Africa, these forces have combined with government mismanagement and deep-rooted corruption that have made the investing climate more uncertain than ever. However, jitters about Sub-Saharan Africa stretch way back. Over the past couple of years, sky high optimism about Africa’s potential has quickly turned awry as the continent’s bond and equity markets took the plunge.

Bear Market Blues

By the end of February 2016, five of the 14 biggest sub-Saharan African equity indices had met the technical definition of a bear market, a situation where an market declines 20% or more from its previous bull market highs. An additional six market gauges have declined more than 10%, raising the specter of additional weakness mirroring the region’s bigger markets.[1]

The carnage has hit Africa’s two biggest economies especially hard. Nigeria, which has been struggling with a shrinking stock market since the end of 2013, declined further into the abyss in 2016. The country’s All Share Index, which tracks general market movement of all shares listed on the exchange,[2] declined more than 15% through the first two months of the year. Since the end of 2016, Nigeria’s main index has declined by half, reaching a valuation of around US$42 billion, which is a small fraction of Singapore’s level and only half of Colombia’s.[3]

South Africa, which is home to the continent’s biggest stock index, has run into its fair share of volatility since 2014. The benchmark FTSE/JSE All Share Index fell below its 200-day moving average in February for the first time since the 2008 bear market, when the index dropped 46% over five months. This time, South Africa’s benchmark index is down 12% from its November 4 peak, with more losses expected over the short-term.[4]

Over-Exuberant Fund Managers, Underperforming Economies

Emerging market funds have been partly responsible for the disappointment. Just a few years ago Mark Mobius, fund manager at Franklin Templeton Investments, said that Africa “could be the emerging market story of the next decade.” His firm was quick to follow Neptune Investment Management and JPMorgan Chase in developing a fund dedicated to the continent. However, the excessive optimism surrounding Africa wasn’t limited to Mobius or his associates. After all, many investors at the turn of the 21st century expected large growth across Africa’s capital and bond markets.

In 2014 the International Monetary Fund (IMF) forecast annual growth for Sub-Saharan Africa to average 5% for the next several years. Naturally, this piqued the interest of many investors, not just Mobius and his associates. While growth in Sub-Saharan Africa did average 5% in 2014, it slowed to 3.5% in 2015 and is expected to pick-up to just 4% this year. Nigeria – Africa’s biggest economy – saw its GDP expand by 6.3% in 2014. The growth rate plummeted to just 3% in 2015 and is forecast to rebound to 4.1% in 2016.[5] Clearly, the outlook on Africa has changed significantly since the commodities plunge.

This is what the IMF had to say about the region in its revised January 2016 World Economic Outlook:

“Most countries in sub-Saharan Africa will see a gradual pickup in growth, but with lower commodity prices, to rates that are lower than those seen over the past decade. This mainly reflects the continued adjustment to lower commodity prices and higher borrowing costs, which are weighing heavily on some of the region’s largest economies (Angola, Nigeria, and South Africa) as well as a number of smaller commodity exporters.”[6]

Investors Thinking Twice

To say that investors have retreated from African equities would be an understatement. Foreign inflows to Nigeria’s stock market plunged 32% in 2015, as a weakening economy and currency controls made the country too risky for foreign investors. While Nigeria’s central bank implemented capital controls in 2015 to curb capital flight from the country, it resisted devaluing the currency amid the oil price collapse. To-date, the country maintains a peg on the naira at 197-199 per US dollar.[7]

However, several African countries have seen their currency drop, as the massive retreat in global commodity prices has made it more difficult for governments to service foreign debt. As a result, yields have soared. Fifteen of 17 Sub-Saharan countries with dollar debt have seen yields surge above 8%. By comparison, only two countries had rates that high just one year ago.[8]

Africa’s Commodity Dependency: A Risky State

Sub-Saharan Africa has one of the highest commodity dependency rates in the world. Commodities such as beverages and tobacco, crude metals, foods, fuels, oils and metals represent more than 20% of net exports for many Sub-Saharan countries, including Nigeria, Congo, Zambia, Angola, Gabon and Chad.[9] A larger number of regional countries are particularly exposed to metal commodities, including South Africa, Mozambique, Namibia, Zambia and Congo.

Weak commodity prices have rocked the global economy. While prices appear to have bottomed in the early part of 2016, energy and metal products are expected to remain low for the foreseeable future. A global overproduction of crude is expected to keep oil prices subdued for years to come. The prospect of higher US interest rates is also raising the opportunity cost of holding gold and other non-yielding assets. Sub-Saharan economies will continue to face headwinds as a result. The same optimism that enticed investors to enter Africa at the height of the bull market in 2012 is unlikely to materialize again in the near term.

[1] Paul Wallace (February 22, 2016). “African Markets Catch Bear Fever.” Bloomberg Business.

[2] The Nigerian Stock Exchange. Market Indices – All Share Index.

[3] Paul Wallace (February 22, 2016). “African Markets Catch Bear Fever.” Bloomberg Business.

[4] Neo Khanyile (February 25, 2016). “South African Stock Slump Is Looking Like ’08 Bear Market: Chart.” Bloomberg Business.

[5] International Monetary Fund (January 2016). Subdued Demand, Diminished Prospects. World Economic Outlook.

[6] International Monetary Fund (January 2016). Subdued Demand, Diminished Prospects. World Economic Outlook.

[7] Yinka Ibukun (January 26, 2016). “Nigeria Flirts With Economic Disaster as Naira Controls Stay.” Bloomberg Business.

[8] International Monetary Fund (January 2016). Subdued Demand, Diminished Prospects. World Economic Outlook.

[9] The Economist. Commodity dependency: A risky state.