Summary

• African markets had mixed returns in December. Kenya declined 2.4% after last month’s strong rally with Morocco 1.2% weaker. Mauritius rallied strongly (5.7%) followed by Nigeria (1.8%) and Egypt (1.1%). 
• Major gainers were Nestle Foods Nigeria (18.3%) and Mauritius Commercial Bank (6.2%) while Nigeria’s Guaranty Trust Bank (-5.3%) and Kenya’s Safaricom (-2.8%) were the two biggest detractors. A weaker US dollar, especially against euro driven currencies, also contributed to the gains in the month.
• Almost all of the Fund’s outperformance came from Egypt where the Fund has an overweight position and its shares gained 6.8% during the month. Ibnsina Pharma, a new listing, gained 40% and was a large contributor to the gains. The Fund’s Egyptian consumer stocks performed well again, led by Eastern Company (14.9%), Obour Land (12.3%) and MM Group (10.2%). The largest detractor from the Fund’s performance was Egypt’s Dice Sports & Casual Wear, which slipped 4.5%. 

Market update - After a great year – what next for African markets

African markets recovered strongly over 2017. Bond investors had a good year, with African Eurobonds gaining 13.8% and local currency bonds gaining 20.2% in US dollar terms. These returns exceeded emerging market average bond gains of 9.3% and 9.9% for Eurobonds and local currency bonds respectively.

Equity investors also had a good year with the MSCI Emerging and Frontier markets Africa ex South Africa index gaining 18.1%.  The returns for the four largest markets are shown in the table below.

^{Source: Bloomberg}

These returns were partly as a result of currency liquidity returning to Egypt in November 2016 and in Nigeria in August 2017, which increased foreign investment and improved sentiment in these equity markets.

Higher crude oil prices have allowed Nigeria to rebuild foreign exchange reserves even while supplying foreign currency to the interbank market. Egypt has also been able to build up its reserves to record levels with International Monetary Fund assistance and the issuing of Eurobonds, combined with portfolio flows. Weaker currencies in both economies has also reduced the demand for imports although this has increased inflation in the short term.

Many African economies have been in a transition phase during 2017 for reasons specific to each economy. The improved GDP growth prospects as we move into 2018 are shown in the GDP growth data shown in the chart below.

^{Source: International Monetary Fund, World Economic Outlook Database, October 2017, Ashburton} 

GDP in countries in Africa with investable equity markets is expected to accelerate from 3.5% in 2017 to 4.0% in 2018. For the next five years, this is expected to exceed global growth and significantly outperform advanced economies.

As mentioned above, inflation has increased in the short term. This is shown in the graph below with year-end estimates for inflation in African countries with equity markets.

^{Source: International Monetary Fund, World Economic Outlook Database, October 2017, Ashburton}

The 6.0% decline in inflation expected during 2018 should lead to lower interest rates in many countries. The need to keep domestic rates high to protect currencies has also dissipated as foreign exchange reserves have grown.

We remain convinced that the improved economic prospects, improving business conditions and better infrastructure will continue to drive earnings growth and thus returns in African equity markets. Lower interest rates should provide further support for valuations.

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

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