Summary

• African market weakness was driven by Kenya (-11.7%), Egypt (-5.7%) and Nigeria (-4.4%). Tunisia was down 9.4% although it constitutes less than 3.0% of the Index. Mauritius was the only Index country which ended the month in positive territory and was up 2.5% driven by a 5.4% increase in Mauritius Commercial Bank. In Kenya, Egypt, Nigeria and Tunisia all sectors were weak in the month with the largest detractor from performance being Safaricom in Kenya which was down 13.4% and constitutes 10.0% of the Index.
• The Fund’s underperformance in the month came mainly from Egypt (-9.4%) where the Fund is overweight and also from Botswana due to Choppies which fell significantly after delaying the release of its financial statements. The Fund outperformed in Nigeria (-1.9%) where it’s exposure to banking, oil and gas shares outperformed the broader Index with building, construction and consumer shares being especially weak. The Fund also outperformed in Kenya due to its underweight position.

Fund activity

With generally weaker markets, we have not seen large variations in market performance. 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, while Morocco remains the Fund’s largest underweight as we view the market as expensive.

Market update

Africa is bucking the trend of higher inflation levels and increases to rates. In an environment where the rising United States 10-year bond yield and increasing inflation in developed economies is constantly in the news, African economies are experiencing something different.  This is in line with our thesis that these economies are relatively diversified away from many global economies and that investing in the continent’s growth is a diversifier of returns.

The graph below illustrates the recent inflation figures for three of the bigger equity markets on the continent.

^{Source: NKC African Economics, Ashburton Investments}

The April inflation level in Kenya was the lowest since January 2013 and the level in Egypt for May 2018 was the lowest it’s been since May 2016.  The increase in June in Egypt is largely as a result of subsidy reductions, especially on fuel.  The subsidy reductions are in line with the IMF program and the effect on inflation should be temporary and therefore the Central Bank of Egypt has kept rates on hold.  Nigerian inflation is currently at a 30-month low.

In a normal global environment these multi-year low levels of inflation should have led to central banks cutting domestic interest rates.  The current and expected rate increases by the United States Federal Reserve (The Fed) have however made central bankers more conservative.  In their recent meetings almost all central banks kept rates on hold – namely in Tunisia, Angola, Ghana, Swaziland, Kenya, Lesotho, Morocco, Nigeria, Rwanda, and Egypt.  Uganda was the exception where the Bank of Uganda raised rates from an all-time low citing inflation risks associated with higher energy prices and a volatile shilling.

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, although as mentioned above, central banks are being cautious. The current economic conditions should be positive for equity markets that will also start anticipating the generally improved economic outlook for the continent in 2018 and beyond.