Summary

• African market weakness was across the board with all markets in negative territory. In Mauritius, Greenbay Properties was down 32.0%. Other large contributors to performance were Eastern Tobacco (-15.1%), Elsewedy Electric (-14.9%) and Nigerian Breweries (-10.2%). Nigerian Banks performed well in weak markets with Zenith Bank up 9.1%, Guaranty Trust Bank up 2.4% and Stanbic IBTC up 2.5%.
• The Fund’s outperformance in the month was mainly from its underweight Morocco position, which was down 5.4% in the month, and overweight Botswana where Choppies recovered somewhat to end the month up 68.5%. Other good contributors were Citadel (22.8%) and Orascom Development Holding AG (20.6%). Some large negative contributors in the month were Nigerian oil companies, Seplat Petroleum was down 9.1% and Lekoil was down 18.7%. In Egypt, EFG Hermes was down 17.5% and Global Telecom Holding was down 16.3%.

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

We have seen some recent data releases that confirm our thesis for Africa outside of South Africa as a long-term investment destination. As we have said before, the economies on the continent are transforming and it is this transformation that is driving a large portion of the growth. While global growth and higher commodity prices are supportive factors for these economies, they are not a requirement. The International Monetary Fund (IMF) released their latest World Economic Outlook in October. Despite some downgrades to global growth, the outlook for African economies remains largely unchanged. The graph below shows the latest updates, as well as the previous forecasts (shown as dots).

GDP growth rate (%)

Source: IMF, World Economic Outlook, October 2018 and April 2018 (shown as dots), Ashburton Investments

An even more important release is the World Bank Doing Business 2019 report. The following graph shows selected information and some analysis of the data from their “Doing Business” project that “provides objective measures of business regulations for local firms in 190 economies”.  We use their “Ease of doing business score” which allows us to assess the level of improvement in the ease of doing business over time.  

Ease of doing business (%)

^{Source: The World Bank Doing Business 2019, Ashburton Investments}

The graph shows that our observations of improvements on the ground can be backed up by the World Bank’s detailed analysis that uses 11 indicator sets to measure aspects of business regulation that matter for entrepreneurship. The business environment for Africa excluding South Africa has on aggregate continued to improve in line with the trend experienced earlier in the century. 

According to the World Bank, Sub-Saharan Africa has been the region with the highest number of reforms each year since 2012. More than a third of the reforms that they captured across the globe in the latest release were from 40 economies in Sub-Saharan Africa. As an example, the average time to register a business in the region has declined from 59 days in 2006 to 23 days. They identified ten economies with the most notable improvements in their latest survey and the list included five African countries, namely, Djibouti, Togo, Kenya, Côte d’Ivoire and Rwanda. Kenya jumped 20 positions to be ranked 61^st in the world, while Rwanda gained 11 places and is now ranked 29^th ahead of Spain, Russia and France.

In the World Bank’s view, Mauritius is the easiest place to do business on the continent and is ranked 20^th out of 190 countries, ahead of countries such as Canada, Ireland and Germany.

Outlook

With equity markets in Africa only just recovering to levels of five years ago, and 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 before, 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.