Summary

• African markets started the year off strongly, largely driven by a strong oil price which saw Nigeria end the month 13.5% higher. Nigeria was strong across the board, but banks were the best performers with many ending the month up over 20%. Nestlé was the outlier which ended the month down 5.6%. Morocco was also strong, gaining 7.0%, driven by Managem (11.5%), Maroc Telecom (12.3%) and Taqa Morocco (15.2%). The biggest detractors for the Index were Greenbay Properties in Mauritius (-25.8%) and EFG Hermes in Egypt (-12.2%).
• Almost all the Fund’s outperformance came from Egypt (9.7%) and Nigeria (22.9%) where the Fund is overweight in both markets. Other than being overweight, the Fund outperformed in Egypt as the recent listing, Ibnsina, continued to perform (25.9%), along with two consumer stocks - MMI Group (20.2%) and Obour Land (20.6%).The outperformance in Nigeria was largely due to an overweight position in oil E&P Seplat Petroleum (23.3%) and the Fund’s overweight banks and underweight consumers position. The largest detractor from the Fund’s performance was Egypt’s Global Telecom (-7.7%).

Market update

In January, the team met with various Egyptian companies for an update on the economy and operating environment in the Country where the Fund has its largest overweight position. As we alluded to last month and in line with what we are seeing in many African countries, the expectation is that interest rates in Egypt will start to come down this year. This is largely due to subsiding inflation and a stabilised currency.

Consumer companies are expected to recover somewhat this year and into 2019, as the second wave of annual salary increases allows the consumer to catch up with huge inflation caused by the devaluation of the Egyptian pound in November 2016. What is interesting to note is that inflation affected the middle class far more than the lower income consumer and so consumer companies selling small ticket consumer snacks, cheap tobacco or meat substitutes have held up relatively well compared to companies selling large discretionary items such as cars. In addition, products such as smart phones have been resilient, especially as the price of smart phones continue to decline.

The performance of the Banking sector will continue to be driven by working capital requirements of the banks corporate clients, however towards the end of the year and into 2019 (especially if interest rates come down), capital expenditure should pick up which will be very beneficial to those banks with large corporate exposures.

Demand in the construction and industrial sector will probably subside somewhat as Egypt’s fast-track power projects have largely been completed. However, companies with exposure to the GCC area and the rest of Africa should continue to benefit from project pipelines in these areas.

Overall we are happy with our overweight position in Egypt. Due to a slowdown in local market turn key projects, we have reduced our exposure to industrials and have switched into an investment bank which should benefit from falling interest rates and increased capital expenditure of local companies as they expand in a better economic environment.

Fund activity

The Fund has reduced its exposure to Kenya and increased its exposure to the BRVM slightly. The Fund’s holdings in Nigeria have remained the same, however, due to the strong rally in January the Fund has a greater overweight Nigeria position. The Fund’s largest exposure is to Egypt, where the Egyptian pound has started strengthening slowly. 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 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.