Summary

• African market weakness was across markets except for Morocco and Tunisia which were flat in the month. Egypt and Nigeria were down 2.7% and 3.0% respectively, contributing to most of the weakness.In both Egypt and Nigeria, all sectors were weak except for Oil and Gas in Nigeria, which was up 8.1%.
• The Fund underperformed in Egypt where its shares were down 5.1% driven by weakness across the board. However, the Fund outperformed the Index due to its investment in Umeme, a Ugandan electrical distributor, which was up 15.5%. The Index does not have any exposure to Uganda. The Fund also outperformed in Nigeria where it is overweight Oil and Gas.

Fund activity

With generally weaker markets, the Fund’s investments have held up relatively well.  However, with no shares rallying strongly towards our fair values very little change has been made to the portfolio.  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.

Market update - Are we seeing a new dawn in African politics?

After the resignation of Zimbabwe’s President Robert Mugabe in November 2017, Emmerson Mnangagwa acted as interim president.  At the end of July a general election was held to elect the next president of the country and members of parliament.

The election seems to have been the most free and fair in Zimbabwe’s recent history.  In African politics, the incumbent leader and party usually have a significant advantage as they have the resources of the state, and in Zimbabwe’s case, the state media too.  The run up to the election was characterised by an unusual amount of free speech for Zimbabwe.  After the results announcement, we have seen a crackdown from the army on demonstrations by the opposition claiming that the election was stolen.  This is a worrying development at the time of writing, even though the Ashburton Africa Equity Opportunities Fund has no exposure to Zimbabwe.

Throughout most of 2017, the four longest serving rulers in the world (except for royalty) were from the African continent.  By the end of the year one, Jose Eduardo dos Santos from Angola had stepped down and Robert Mugabe had been forced to resign.  They had ruled their countries for 38 and 37 years respectively and their incumbencies had been characterized by allegations of corruption, especially in their later years.  Although South Africa limits its presidents to two five-year terms, the administration under President Jacob Zuma had also become tainted with corruption that became known as state capture.  Under pressure from the ruling party, he resigned in February 2018 to be replaced by President Cyril Ramaphosa.  In Botswana, we are saw another peaceful and orderly transfer of power as President Ian Khama stepped down after 10 years in office, the maximum period allowed under the country’s constitution.  Liberia faced a test of its constitution recently when the first elected president after its two civil wars came to the end of her two six-year terms.  Elections were held in the last quarter of 2017 and in January 2018, President George Weah was sworn in.

Except in Botswana, which has a very low corruption score, these changes have been welcomed as significant improvements, with greater levels of governance and reduced corruption anticipated. As an indication of how “strong-man” politics have dominated the African political landscape, these changes have been celebrated despite there having been no change in the ruling party in most of the countries.

The new leaders were quick to move against corruption once they came to power.  Although Angolan President Joao Lourenco was handpicked by his predecessor, he didn’t waste any time in replacing leaders in key sectors of the Angolan economy, including the diamond and oil sector, where he sacked the former president's daughter as head of the state-run oil company.  Interim President Emmerson Mnangagwa allowed the Zimbabwe Anti-Corruption Commission to intensify its anti-graft drive, with some of the most corrupt former cabinet ministers being arrested.

With these positive changes to leadership and term limits becoming more entrenched across the continent, it certainly seems as if a new dawn has arrived for African politics.

But Africa isn’t a country and we do need to mention some areas of concern.  In Rwanda, Burundi and Uganda, we have seen recent changes that have allowed political leaders to extend their terms of office and Cameroon’s President Paul Biya remains the world’s longest serving leader after almost 43 years at the helm.  Despite these problems though, the continent as a whole is improving and becoming more democratic.  If one considers the Economist Intelligence Unit’s (EIU) very comprehensive Democracy Index that considers 60 different indicators for each country, African countries have reduced their gap with the global average score moving from 0.70 to 0.14 over the past eight years.

Truly, a new dawn has arrived, on top of an existing trend of improving politics in Africa.

Outlook

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.