BREXIT: Are African markets overly sensitive or there is more to it?

Dear Africa interested individuals:

                                                        Developed and major African markets took a tumble after British citizens voted to leave the European Union last week Thursday.  As the markets tumbled in Africa, analysts were (and still are) screaming themselves hoarse that Brexit is the cause.  Is Brexit a coincidental excuse for the market downturn in Africa over the past three trading days or does it run deeper?  This got me thinking and I went looking for answers.  

I picked three developed markets and seven African markets for assessment purposes.  

1. U.K.  (FTSE 100)  The U.K. is included here as a reference constant. 

2. U.S.A.  (Dow Jones)

3. Germany (Frankfurt Dax)

4. Egypt

5. Kenya

6. Nigeria

7. Cote D' Ivoire (BRVM)

8. Ghana

9. Morocco

10. South Africa

The big concern for any country should be: how much do we earn from U.K. imports and will this figure be negatively impacted post-Brexit?  The first half of the question is what we will focus on here as it is immediately quantifiable.  

U.S.A. earned $44.4B in 2014 from exports to the U.K.

Germany earned $100B in 2014 from exports to the U.K.  Germany is U.K.'s largest trading partner globally.

Egypt earned $1.42B in 2014 from exports to the U.K.

Kenya earned $398m in 2014 from exports to the U.K.

Nigeria earned $5.21B in 2014 from exports to the U.K.

Cote D' Ivoire earned $237m in 2014 from exports to the U.K.  

Ghana earned $388m in 2014 from exports to the U.K. 

Morocco earned $998m in 2014 from exports to the U.K. 

South Africa earned $6.18B in 2014 from exports to the U.K. U.K.'s largest trading partner in Africa and South Africa's largest source of foreign direct investment.  

Logically, the more a country earns from exports to the U.K., the more volatile its market should be to the news of a vote to leave the EU winning at the ballot box.  I will focus on how the above mentioned markets performed on the three trading days post referendum - Friday, Monday & Tuesday.  

The German index declined by 7.89%.

The American index declined by 3.34%.  

The U.K. index declined by 3.12%

U.K. trading partners appear more perturbed than the Brexit nation given the message sent by their respective markets.  Is this a sign that the lawmakers will not make Brexit law or schedule another referendum?  The FTSE 100 actually fell only on Friday and Monday and rose by 2.64% on Tuesday.     

If you look closely, the DAX performed worse than the Dow Jones by a multiple very similar to how much more Germany receives from the U.K. for its exports compared to the U.S.A.  2.36 to 2.25X.  The developed markets have behaved rationally and as I would expect.  It is interesting to note that both markets performed worse than the FTSE 100 (declined 3.12%) over the three days reference period.  Let us head to the African markets and see how they performed over the three-day period. 

Egypt index declined by 4.43%

Kenya index declined by 2.88%

Nigeria index declined by 4.81%

Cote D' Ivoire index declined by 0.09%

Ghana index rose by 0.6%  

Morocco index declined by 0.26%

South Africa index declined by 4.56%

The Egyptian, Kenyan and Nigerian markets have overreacted to Brexit and should not have declined to the extent they did given earnings from exports to the U.K.  South Africa (JSE) index should have had the worst index performance in Africa given the amount of export earnings (largest U.K. trade partner in Africa) and FDI from the U.K.  Nigeria took the award instead.  

The Cote D' Ivoire (BRVM), Ghana and Morocco markets have under-reacted or gone in an unexpected direction (Ghana) to Brexit and should have declined more than they actually did given export earnings form the U.K.  

The two major standouts for over and under reaction are Nigeria and Ghana respectively.  Nigeria index performed worse than South Africa despite South Africa being more trade dependent on U.K. and also being an emerging market.  Ghana index rose over the past three days when all other markets observed (developed, emerging and frontier) declined.  How have these six African markets performed year-to-date as at June 28, 2016?

Egypt: -1.06%

Kenya: -10%

Nigeria: +3.26%

Cote D' Ivoire: +0.59%

Ghana:  -10.39%        

Morocco:  +6.93%

Interesting observations: The three frontier markets (Kenya, Nigeria & Morocco) have disparate figures for the three trading days post-brexit.  The two emerging markets (Egypt & South Africa) have similar figures for the three trading days post-brexit. 
  

A cursory look at the above reveals that Nigeria is the only market in the overreact category that has a positive year-to-date performance.  Ghana is the only market in the under-react category that has a negative year-to-date performance.    Nigeria index has a positive year-to-date performance after reacting excessively to Brexit.  Ghana index has a negative year-to-date performance after reacting positively (instead of negatively) over the past three trading days to Brexit.   

African markets are clearly sensitive on the downside to Brexit, but, there is more to it.  The two markets with the most unexpected reaction to Brexit relative to other African countries with trade exposure have year-to-date index performances out of sync with categorized peers.  I see the Ghanaian market as having less volatility for the rest of 2016 in comparison to the Nigerian market.   

Is Brexit saying the Nigerian market should go down and the Ghanaian market should go up? We will have to wait and watch things unfold.      

P.S.  

Pakistan has moved from a standalone market (where BRVM and Ghana are presently) to an emerging market in the MSCI market classification in less than eight years.  African frontier markets need to rise above political bureaucracy and selfish interests if they want to be the next Pakistan.  Focus on the WE and not I.     

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