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Africa Equity Opportunities Fund - March 2018

Kenya and Egypt lead gains during weak February for African markets.


  • African markets were weaker in March driven largely by Mauritius, which saw Greenbay properties down another 21.7%. Morocco was weaker across the board and Nigeria was down 0.7% largely driven by Nigerian Breweries (-7.5%). Kenya ended the month up 1.6% as Kenya Commercial Bank rose 5.2%.

  • Almost all the Fund’s outperformance came from Egypt (5.3% versus index -0.4%). The main drivers of this outperformance were Dice Sport and Casual Wear (12.4%), Ibnsina Pharma (14.7%) and Eastern Tobacco (19.5%), while Obour Land (-11.9%) was the major detractor.The Fund outperformed in Kenya and its underweight Morocco position also added to the month’s outperformance.The overweight Nigerian Oil and Gas position detracted from performance with Seplat and Lekoil down 3.5% and 5.2% respectively.

Market update - Why investors should be allocating more to African markets

Despite the news flow from Africa that typically focuses on the worst issues and incidents that occur on the continent, we believe that the underlying fundamental changes happening in the better economies are irreversible and will continue to generate significant growth.

African equity markets recovered strongly over 2017 with the MSCI Emerging and Frontier markets Africa ex South Africa index gaining 18.1% and a further 4.9% year to date in 2018.  Despite these gains we believe that this is just a return from heavily oversold levels and that markets can continue to provide good returns for investors in the medium term.

During his budget speech last month, the (now former) Finance Minister of South Africa, Malusi Gigaba increased the prudential limits that allow pension funds to invest a portion of their members’ funds outside of the country. Specifically, the limit for African investing was raised from 5% of the pension fund’s assets to 10%. 

There are many reasons why we believe investors, and South Africans in particular, should allocate more of their retirement savings to African equities. Here are some of the key considerations:

  • Investing in a region that is growing quickly and where the economies are transforming their infrastructure, middle class consumers are growing and they are industrialising too;

  • Getting returns from a region that, because of its transformation, is not as connected to global events and markets as most other investment destinations, which allows investors to diversify returns;

  • The improving investor sentiment that is emerging for the continent will mean increased focus on these markets and share prices should recover from oversold positions providing additional returns over and above the strong growth outlook;

  • For South Africans, taking advantage of the current strong rand to US dollar exchange rate to invest in offshore assets;

  • Choosing an experienced manager who knows the continent and can avoid most pitfalls and generate excess returns over the economic cycle.

In our December commentary we elaborated on the expected GDP growth for economies that have investable equity markets, which is expected to accelerate from 3.5% in 2017 to 4.0% in 2018.

To illustrate the diversification benefits, we have calculated the correlation for the US dollar returns of the respective indices on a rolling 12-month basis from 2 June 2002 until 10 January 2018.  Over this extended period, Africa ex SA has a very low correlation to global markets of 0.24 and to South Africa it is even lower. To further illustrate the diversification benefits of investing across the continent, we can see that the two biggest markets, Nigeria and Egypt, also have a low correlation to each other of 0.16.


Source: Bloomberg, Ashburton Investments

In other ways too, Africa is marching to its own drum.  We expect inflation to decline by about 6% in 2018 for African countries with equity markets. This is at a time when global inflation is rising.

The less developed nature of African equity markets lends itself to active fund management, meaning that selecting shares can add value over investing in an index (by 3%-4% per annum). The following chart shows the returns for an investor in the Fund compared to the MSCI Index for Africa ex South Africa. 


Source:  State Street, Ashburton Investments, Bloomberg. Fund price net of fees and costs.

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.


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