Despite geopolitical shocks and heightened market volatility, African equities continue to offer compelling value. Rami Hajjar explains how stronger macroeconomic fundamentals in key markets such as Nigeria and Egypt, together with attractive company valuations, support a positive long-term investment case for African equities.
The year began on a very positive note for global risk assets, particularly across emerging and frontier markets, including Africa. Developed markets, led by the US, were on a disinflationary path, interest rates were expected to decline further, and the combination of higher yields and lower valuations attracted significant capital inflows into emerging and frontier markets. This supported strong equity market performance, with the MSCI EFM Africa ex-SA Index rising 8.6% year to 16 February 2026, when it reached its pre-war high. The outbreak of conflict subsequently triggered a sharp risk-off episode, with the EFM Africa ex-SA Index declining 13.3% to a trough on 31 March 2026, before recovering and returning to levels seen in February.
The recovery in asset prices should not be interpreted to mean that the conflict left no significant residual effects. The war and the temporary closure of the Strait of Hormuz led to a sharp increase in energy prices and global freight rates. For many import-dependent African economies, this translated into higher import bills, placing pressure on foreign exchange reserves and external balances. At the same time, weaker investor sentiment towards risk assets resulted in capital outflows from several African markets, contributing to balance of payments pressures. In addition to this, the inflationary impact of higher energy and transportation costs has led to a somewhat more hawkish policy backdrop in developed markets. Despite these challenges, we believe that African economies are better positioned to withstand the current shock than they were when the Russia-Ukraine conflict broke out. Many African economies have entered this period from a stronger macroeconomic position, having implemented more orthodox and market-friendly policies in recent years. Policymakers have also generally responded in a more proactive and disciplined manner to the current shocks and are seemingly avoiding the types of distortive measures implemented in previous crises, such as the imposition of capital controls.
Stronger foundations help African economies weather volatility
Two of the Allan Gray Africa ex-SA Equity Fund's largest country exposures, namely Nigeria and Egypt, illustrate this. Both countries entered this period of heightened global uncertainty with stronger macroeconomic foundations than in previous crises. In Nigeria, the government has pursued a more orthodox policy mix, efforts of which include tighter monetary policy, positive real interest rates, a more market-determined exchange rate, the removal of fuel subsidies and broadening the tax base.
Similarly, Egypt has moved towards a more flexible exchange rate regime with reduced central bank intervention, while advancing fiscal consolidation through measures such as reductions in fuel and electricity subsidies. The behaviour of both currencies during the period of market stress illustrates this point. Following the conflict, the Nigerian naira weakened marginally and currently trades around NGN1 379 per US dollar, broadly in line with pre-conflict levels. In Egypt, the pound weakened from below EGP48 per US dollar prior to the conflict to nearly EGP55 at the height of market pressure, before recovering towards EGP49. Importantly, at no point during the episode were investors unable to repatriate capital from either country.
Contributors to the Africa ex-SA Equity Fund’s year-to-date performance have been its exposure to Nigerian oil and gas producer Seplat Energy, Nigerian banks and Zimbabwean beverage producer Delta Corporation, while positions in Zimplats, a Zimbabwean platinum miner and Umeme, a former Ugandan energy distributor, detracted from performance. On a relative basis, the Fund benefited from the material underweight in Morocco. Some of these key positions were highlighted in our previous commentary for the first quarter of the year.
We continue to view the African investment universe, and particularly the companies held within the Fund, as offering compelling relative value compared to global equity markets. The weighted average price-to-earnings ratio of our top 10 holdings is approximately 7.3, with an average dividend yield of 5.8% and an average return on equity of 42.5%. This compares favourably with the S&P 500, which trades at approximately 22 times forward earnings and the MSCI World ex-US Index, which trades at around 16 times forward earnings. Barring a significant global shock, we believe there remains scope for this valuation gap to narrow further over time.