Summary

• Gains in Nigeria (2.2%) and Morocco (0.5%) largely offset weakness in Mauritius (-3.8%), Egypt (-1.4%) and Kenya (-1.0%).  Mauritius’ long rally ended and Egypt’s weakness came from Commercial International Bank (-3.4%), which was also the largest negative contributor in the index. A strong US dollar had a negative effect, especially in currency areas with a euro association (Morocco, Mauritius and francophone West Africa).
• The Fund outperformed strongly in Egypt and Mauritius. The Fund’s consumer shares in Egypt were the biggest contributor to the gains, notably MM Group (22.2%) and Eastern Company (7.0%). Nigerian banking shares (6.4%) also contributed strongly. Seplat Petroleum’s 5.5% decline was the largest negative contributor, due to it being the largest position in the portfolio. The Brent oil price rallied 7.8% in the month and this should have a positive effect on Nigeria as well as the Fund’s oil and gas exposure.

Market update - It is getting easier to do business in Africa

Based on our visits and interactions with company management in many African countries, we observe a continuing improvement in the operating environments for businesses. The World Bank have recently updated their “Doing Business” project that “provides objective measures of business regulations for local firms in 190 economies”. We use their “Distance to Frontier” measure which allows us to assess the level of improvement in the ease of doing business over time and especially relative to the rest of the world.

Distance to frontier

^{Source: The World Bank and IFC, Doing Business 2018 *Adjusted to limit the effect of methodology change}

The graph clearly shows that the business environment continues to improve in line with the trend experienced earlier in the century. Mauritius is the easiest place to do business on the continent and is ranked 25^th out of 190 countries having jumped 24 positions in the year. Rwanda and Morocco are at positions 41 and 69.  Kenya gained 24 places and is now the fourth easiest place to do business in Africa.  We are already seeing significant improvements in Nigeria, which moved up 24 places in the global ranking in the year and expect that as conditions improve in Egypt we should see improvements there too.

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.