African stockmarkets are on the up. Is the continent at last becoming a safer bet?

When world stockmarkets took a battering in mid-August, the FTSE/JSE Africa All-Share Index fell four per cent—its biggest drop in four years. But, unlike other markets, the Johannesburg Stock Exchange quickly clawed back its losses. The reason was simple: commodities underpin African stock exchanges. They make up 40 per cent of the JSE All-Share Index—and demand for them has soared in recent years.

Africa's stockmarkets are booming on the back of rising commodity prices, economies are more stable and investment is being made both locally and from overseas. At the same time, UK companies are taking advantage of business opportunities in Africa and more African firms are floating on the AIM.

Crucially, it is not just the South African stock market that is riding high. Fast-developing nations such as Nigeria, Botswana and Ghana are now attracting interest alongside the more developed South Africa. According to Exotix, which specialises in emerging markets, the sub-Saharan Africa markets rose 38 per cent during the first six months of 2007.

Rod Evison at CDC, a UK government-owned fund of funds investor, which has around £2bn of assets in the world's poorest countries, says: "There is a fundamental change in the terms of trade for Africa. In the past people thought there would be a decline in commodity prices. That has changed."

According to Evison it is not just mining, oil and gas, but agricultural commodities such as rubber, sugar and coffee that are in demand. The Chinese, in particular, have ploughed billions of dollars into Africa in an attempt to secure interest in its vast store of natural resources, raising concerns as to whether such investment is sustainable. One of China's most lucrative partnerships, for example, is with Robert Mugabe's inflation-ridden Zimbabwe.

This highlights the dilemma facing investors into the emerging markets in Africa. But on the positive side, a knock-on effect of foreign demand for commodities has been investment in African infrastructure, such as transport and telecoms, which encourages more investment. There is also a growing emphasis on financial firms. Little more than a year ago Nigeria had just one bank capitalised above $1bn in market cap terms. But, following a government consolidation drive, there are now six banks of this size, which vary from $1bn to $3bn.

Recent African IPOs demonstrate the variety of companies—and the demand for shares. They include the dominant Dangote Sugar Refinery, which raised N54bn (£213m) on the Nigerian Stock Exchange, the highest amount to be raised by a manufacturing company. The listing was 300 per cent oversubscribed.

KenGen, the Kenyan power company that last year became Kenya's first IPO in a decade, also dominates its sector. It produces about 80 per cent of the electricity consumed in the country. On its market debut, the shares closed at nearly four times the issue price.

The African effect is already being felt in the UK. Wealth manager Helvetica is launching an Isle of Man-domiciled, AIM-quoted company called the PME African Infrastructure Opportunities fund; LonZim is in the process of raising £50m to invest in a range of assets, such as commercial property, infrastructure and telecoms, in Zimbabwe; and New Star Asset Management is about to launch its Heart of Africa Fund. Investors there believe Africa is set to follow Brazil, Russia, India and China to become the next emerging market. But John Duffield, the founder and chairman of New Star, warns: "The biggest profits are made at the time of the biggest risks and there is a hell of a risk with these African markets at this time."

Indeed, Botswana is the only African nation with an A+ credit rating from both Standard & Poor's and Moody's. But the World Bank remains upbeat. In a recent report, it said that sub-Saharan Africa is showing economic growth that could lift thousands of people out of poverty.

It is a trend that is expected to continue, according to the World Bank, as many African countries seek to establish solid economic policies while battling corruption. Barriers are breaking down, too, says Evison: "Businesses are taking a more regional approach to their business, and some are taking a global approach," he explains. "It means businesses can get to a greater size and scale and that is important in attracting investors." Another factor, says Evison, is that increasingly, people are being educated overseas and then returning to Africa, bringing key skills back with them.

In addition, more and more local capital is being invested, which acts as a catalyst for foreign capital. "This makes it more liquid and helps move up share prices as well," says Evison.

Break down the stockmarket figures by country and it is easy to see the star performers. Nigeria, the largest market in the region, rose 56 per cent in the first half of the year; Botswana and the Ivory Coast rose 51 per cent; while Zambia and Malawi rose a staggering 70 per cent over the same period. The only market to fall during the first six months of the year is Kenya, down 5 per cent.

But Evison urges caution. "We shouldn't get ahead of ourselves," he says, explaining that the African stockmarkets have been undervalued in the past. But he adds: "Nigeria and Kenya should get to levels that are quite challenging and rely on strong growth in earnings to underpin this." There are good prospects for earnings, and good growth in sectors such as telecoms and breweries. "You have to be careful because these markets are still narrow," he says. "Small capital can have a big impact on share prices. Infrastructure is still pretty basic and that's an area where significant improvement is needed."