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Africa Equity Opportunities Fund - July 2018

Nigeria outperforms despite a weaker month for African markets generally.


  • African markets were slightly weaker in June. Morocco ended the month down 2.9% with general weakness across the sectors. Mauritius was also down 2.9%, with Greenbay Properties falling 10.9%. All the other markets largely counteracted this weakness with Nigeria being the stand out performer up 1.7% largely driven by Brewing and Beverages (Nigerian Breweries 3.6%) and consumer stocks (Nestle Nigeria 3.6%).
  • The Fund underperformed the index due to its underweight Nigerian consumer and brewing stocks, its overweight Uganda (Umeme -16.8%) and overweight Botswana (Choppies-21.1%). This was slightly counteracted by the Funds underweight Morocco position and overweight Egypt position (1.8%) with off benchmark stocks doing particularly well, such as Ibnsina Pharma (18.5%) and Qalaa Holdings (16.8%).

Market update - How will technology affect Africa’s continuing growth?

Talk of artificial intelligence (AI) and the advent of the fourth industrial revolution, has created fear in developed countries that many jobs will be lost to machines and robots and that economic growth will be stifled by technological advances.

We, however, believe that the African continent may well be able to benefit from these technologies in ways that possibly aren’t envisaged in more developed economies. History shows us that people on the continent have been strong adopters of new technologies and that Africa has even bypassed existing developments. After skipping the roll out of land lines, mobile technology users were quick to see the benefits this could bring, especially mobile money. Sub-Saharan Africa, with just under half of all the mobile money platforms in the world, is leading the globe in rolling out financial products to masses of people who were previously excluded from this area of the formal economy (63% of the value of all mobile money transactions in the world are in Africa).

An important aspect of harnessing new technology on the continent will be the ability to increase the level of manufacturing. Dr Cilliers from the Institute of Security Studies in a paper in April 2018 “Made in Africa, Manufacturing and the fourth industrial revolution”, points out that whereas low end services are typically twice as productive as agriculture, manufacturing is six times more productive. Urbanisation across the continent has therefore added to growth mainly through increased productivity of people leaving the agricultural sector and moving to low end services jobs in towns and cities. However, this growth may be limited unless the trend of de-industrialisation on the continent can be halted. Manufacturing and industrial growth have also been shown to improve productivity in agriculture, which will also benefit from new technologies. In addition, because the industrial sector requires sophistication, this leads to the development of higher end services, which in turn are much more productive than low end services and thus further enhance economic growth. 

Dr Cilliers expects average GDP growth for the continent to 2040 of 4.8% per annum. However, he believes that with a vibrant manufacturing sector this could reach 6.5% per annum. The effect is even more significant for low income countries and therefore has the potential to alleviate poverty on the continent. His estimates show that Africans living in extreme poverty could be reduced by a third by 2040 if a successful industrialisation path is followed (compared to an increase of about 10% if it is not).

For manufacturing to be efficient it has to have scale, and therefore markets have to be large enough and close enough to justify the capital expenditure required. “Made in Africa” will thus also mean “Made in Africa for Africa” in order for it to be successful. The recent signing by African leaders of the Continental Free Trade Area (CFTA) is a positive move in this direction. The CFTA envisages a single continental market for goods and services, with free movement of business persons and investments and ultimately an African customs union. This will facilitate intra-Africa trade and provide larger markets that will encourage investment into manufacturing.

Governments will have to provide the appropriate business and supportive environment for investment to take place in the manufacturing sector. Using Rwanda’s success story as an example, Makhtar Diop, the Vice President for Africa at the World Bank, had the following closing remarks at the World Economic Forum for Africa in 2016, “implementation, implementation, implementation”.  Ultimately, this will be the key differentiator between African countries.

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.


With equity markets in Africa only just recovering to levels of five years ago, but growth continuing for many of the underlying businesses over that period, there is clearly impetus for significant future returns through active management and stock selection. Lower interest rates should provide further support for valuations. This will be positive for equity markets that will also start anticipating the generally improved economic outlook for the continent in 2018 and beyond.