Summary

• African markets were 1.6% stronger in March. The strength was largely driven by Egypt (12.8%) and Kenya (9.5%). In Egypt, the largest component of the index, Commercial International Bank was up 15.3% and in Kenya, banks and financials were up 16.9%. Nigeria was 6.3% weaker, driven by general weakness in the market. Mauritius was 10.3% weaker driven by Greenbay Properties which was down 29.3%.
• The Fund underperformed due to its underweight banks and financials in Egypt (8.0% versus index 13.5%) and its underweight position to telecoms in Kenya (Safaricom was up 4.4%) and overweight position in the cement sector (ARM Cement was down 26.5%). The Fund was also affected by Choppies in Botswana losing 28.3% in the month. The Fund outperformed in Nigeria, where it is overweight the Oil and Gas sector which ended the month up 3.9%.

Market update - Zimbabwe – should you be investing?

Zimbabwe’s political landscape has seemingly changed for the better after the resignation of President Robert Mugabe in November 2017. The interim president, Emmerson Mnangwaga, has come across as a more investor friendly leader than his predecessor. For one, the indigenisation policy of 51% local ownership for companies has been scrapped for all sectors except for diamond and platinum mining. Further to this, what it means to be ‘Zimbabwean’ has changed from being an indigenous Zimbabwean to being a citizen of Zimbabwe. The Reserve Bank of Zimbabwe (RBZ) has also created the Zimbabwe Portfolio Investment Fund which is aimed at facilitating repatriation of the sale proceeds and dividends of securities-related transactions to encourage new investors into the stock market.

However, the country is still plagued with currency shortages which is severely hindering the economy and the operational capability of companies – especially those who rely on imported inputs for their products. Many may argue that a better political environment will encourage international investors to bring money into the country in the form of Foreign Direct Investment (FDI) or support from Development Finance Institutions (DFIs), however if investors can’t get their money out of the country this is very unlikely in our opinion. Even the Zimbabwe Portfolio Investment Fund has not been adequately funded to clear the current backlog of investors waiting to exit the country.

We have in the recent past witnessed foreign currency shortages in Nigeria and Egypt which chronically stalled these economies too. However, because these two countries had their own currencies, they could devalue to a point that attracted foreign investment and this provided the necessary foreign currency. Unfortunately, this is not an option for Zimbabwe as it does not have its own currency.

With all of this in mind, it’s interesting to note that the Zimbabwean stock market was the best performing stock market in Africa in 2017. However, this performance was largely driven by investors looking to hedge against currency shortages and devaluation fears (through the possible introduction of a new currency) by hiding in ‘real’ assets. When the perceived risk in the economy reduced after the resignation of Robert Mugabe, the stock market actually fell over 50%. The falling stock market was due to a more positive outlook on the economy by investors, which is counterintuitive. However, this can be explained by the Old Mutual Implied rate which decreased considerably at this time. This is a comparison of the price of Old Mutual shares in London or Johannesburg and Harare and is used as a proxy as to what a “Zimbabwean” dollar is worth against the US dollar. This rate is currently reflecting a discount of around 40%, which is similar to the premium that you would get using physical US dollars in Zimbabwe, as opposed to paying with electronic dollars through the banking system.

Even after the significant pull back, the Zimbabwean stock market remains elevated in our opinion.  Especially considering the risks with respect to currency and the difficult operating environment for companies that persist even after the Mugabe era has come to an end.  The elections which will be held in July 2018 will most likely solidify Emmerson Mnangwagwa as the official President of Zimbabwe and possibly renew interest in the country once more, although, we see far more positivity already priced into the stock market than is justifiable. Having said that, Zimbabwe is certainly an investment destination we continue to keep an eye on and consistently evaluate and re-assess our views on the economy.

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. This will be positive for equity markets that will also start anticipating the generally improved economic outlook for the continent in 2018 and beyond.