Africa Equity Opportunities Fund - March 2019

African markets continued their rally in aggregate over February. The regional West African market (BRVM) performed strongly and was a large contributor to index gains. 

Summary

  • African markets continued their rally in aggregate and the Fund returned 9.4% year to date.
  • The exception to the rallying African markets was Morocco, which declined 3.4%. Morocco is the largest weighted market in the MSCI EFM Africa ex SA index and this therefore was the biggest drag in the month. The Fund has no direct exposure to Morocco.
  • The regional West African market (BRVM) performed strongly and, despite its small weight, was a large contributor to the Index gains. The Fund owns Sonatel (a Senegalese and regional telco) and its 20.6% US dollar return resulted in it being the biggest contributor to the Fund’s gains in February.
  • Kenya’s Safaricom gained 9.8% making it the second biggest contributor to the Index after Egypt’s Commercial International Bank, which gained 6.3% and has the largest weighting in the Index. The Fund’s stock picking gains in Egypt were largely offset by losses in Kenya, where Co-op Bank and Centum, with declines of 9.3% and 3.7% respectively, were the two largest detractors for the Fund in February.

 

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Fund activity

The sales of two shares in February resulted in a further reduction of the Fund’s exposure to Egypt. The majority shareholder of Global Telecom, Veon, announced its intention to make an offer to the other shareholders which resulted in a strong rally. The Cairo Appeals Court significantly reduced the antitrust fine placed on Ibnsina Pharma, which caused the share to rally as the potential liability has mostly been provided for. The Fund still has its largest exposure to Egypt, while Morocco remains the Fund’s largest underweight as we view the market as expensive.

Overall, the Fund outperformed the MSCI EFM Africa ex South Africa benchmark by 0.5% in February.

Market update

Elections in Nigeria

Undoubtedly the biggest event in Africa in February was the Nigerian elections. With 82 million registered voters and 120 000 polling stations, the scale of the election is enormous and a major logistical effort in a country two thirds the size of Western Europe. The Independent National Electoral Commission (INEC) were forced to postpone the election for a week due to bad weather which would have prevented all the polling booths opening on voting day.

In the end, the delayed elections took place reasonably peacefully, especially when compared to previous elections, and resulted in the return to office of President Buhari for a second term. The change in government in the May 2015 elections when the incumbent Goodluck Jonathan gracefully accepted defeat was an important indication of the political maturity that Nigeria had reached in a relatively short time, considering that the country only returned to democracy in 1999.

The turnout was particularly low at 35% overall and was especially low in the main opponent Atiku Abubakar’s strong holds of the South-South (28%) and the South-East (20%). Atiku only managed to attract 41% of the vote and 3.9m fewer votes than Buhari, although he was a preferred candidate of the business community. Atiku promised to proceed with some privatisations and to reduce subsidies as well as fully float the currency. The return of 76-year-old President Buhari to office allows for some continuity in government, which we believe will ensure that up to eight months are not wasted while legal routes are followed by the opposition in an attempt to nullify the elections. In Nigeria there is a considerable delay between winning the election and running the country. The presidential inauguration will be on 12 June 2019 and if there is a change in administration the new president will first have to appoint a cabinet. This process could take some time as the ministers have to be approved by the senate. The new administration also has to operate within the 2019 budget for the first six months of its tenure. Despite the poor economic track record in his first term, we believe that Buhari will want to leave a legacy, especially of reducing graft. His vice president and party will also want to position themselves to win the next elections in 2023 and should thus focus on improving their party’s economic policies.

With the uncertainty of the election out of the way and current oil prices at levels which are good for the current account balance and fiscus, we expect that the market should start anticipating future economic growth and we could see a rally off current levels.

Outlook

African equity markets are starting to gain after recent lows. Meanwhile, growth has been continuing for many of the underlying businesses and thus there is clearly an impetus for significant future returns through active management and stock selection. Lower interest rates should provide further support for valuations, especially in Egypt. The current economic conditions should be positive for equity markets that will also start anticipating generally improved economic outlooks for the continent in 2019 and beyond.