Summary

• A rally in the US dollar accentuated weak equity markets almost across the African continent.  Following the Kenya Supreme Court’s decision to annul the presidential election, this market led the decliners with the market falling 5.8% in US dollar terms (although the currency was stable). Morocco (-3.3%) was the next largest contributor to the weakness, followed by Egypt (-3.0%) and Nigeria (-1.7%). Mauritius had another good month with gains of 2.8% in US dollar terms despite a 3.6% decline in the local currency.
• The Fund outperformed strongly in Egypt and Nigeria, with consumer shares in Egypt being the biggest contributor to the gains, Notably MM Group (33.1%) and Obour Land (11.7%). In Nigeria, Seplat Petroleum’s 9.5% gain was the main contributor. As with the index, Kenya was the major detractor from performance and the Fund’s lack of exposure to Morocco also contributed to its outperformance in September.

Market update

After the Supreme Court in Kenya annulled the presidential elections and insisted that they be re-run, many commentators made the point that democracy is coming of age in Kenya and that the judiciary is truly independent. Certainly, this is the first time that anything like this has happened across the continent. 

In 2015, we witnessed the peaceful transition of power in Nigeria, Africa’s most populous country. President Goodluck Jonathan conceded defeat to his opponent and current President Muhammadu Buhari in only the fourth democratic election since the end of military rule in Nigeria in 1999. West Africa seems to be leading the way as we have seen three transitions of power in Ghana in the past 20 years.

Unfortunately, we have seen some changes made and some that are being made to countries’ constitutions to allow the incumbent to stand again. President Yoweri Museveni was re-elected in Uganda in 2016 for a further five years to extend his current 30-year incumbency. The Ugandan parliament is currently debating the removal of the presidential age limit in the constitution, which would allow him to stand again. In December 2015, Rwandese voted overwhelmingly in support of a change to the constitution that now allows President Paul Kagame to potentially extend his incumbency to 2034 (at which point he will have been in charge for 40 years).

In less democratic countries, we have also seen communications interrupted at election times or during mass protests against long serving leaders. Often these take the form of a social media blackout of applications like Facebook, Twitter and WhatsApp.

Despite this, there is a general sense that democracy is improving across the continent, aided by improved communication and a younger generation who hanker for better economic management.  The Economist Intelligence Unit (EIU) publishes a comprehensive Democracy Index, rating 167 countries on a scale of 0 to 10. Their score is based on the ratings for 60 indicators grouped in five categories, namely: electoral process and pluralism; civil liberties; the functioning of government; political participation; and political culture. In terms of this analysis, even countries that hold elections can be classified as ‘authoritarian regimes’ (yielding a score below four) if the environment is not conducive to a fair vote taking place. African examples of this type of regime include Zimbabwe and Egypt.

The chart below shows the data for the last six years, indicating the percentage of Africans in the 49 African countries (excluding South Africa) that are contained in the report living under each type of regime.

^{Source:  The Economist Intelligence Unit, International Monetary Fund’s World Economic Outlook 2016, Ashburton}

Based on the EIU’s 2016 calculations, Mauritius (regarded as a full democracy) is Africa’s most democratic country, ranking 18^th out of 167 countries, ahead of the United States at 21^st. Cape Verde (23^th), Botswana (27^th), South Africa (39^th) and Ghana (54^th) make up the rest of the top five African states. All are classified as ‘flawed democracies’.

It is import to note however, that over the last six years, the improvement in democracy across the continent means that less than 50% of Africans now live in authoritarian regimes, down from 73% in 2010. The average score is also improving for Africa. Sadly, more than half of the world’s 51 authoritarian regimes (27 of them) are still found on the continent, so there is still much work to be done.

Fund activity

The Fund has maintained its total exposures to Kenya and Nigeria broadly in line with the index, although the underlying holdings vary considerably. The Fund still has its largest exposure to Egypt, where the Egyptian pound has started strengthening. Morocco remains the Fund’s largest underweight as we view the market as expensive.

Outlook

With many economies across the continent on a recovery path and inflation declining, we expect interest rates to start coming down from the end of the fourth quarter. This will be positive for equity markets that will also start anticipating the generally improved economic outlook for the continent in 2018.