Summary

• African markets were down in the month. Foreign selling of Kenyan equities continued and the resultant market weakness (-6.8%) was the major contributor to the negative returns of the month. Morocco, following on from a strong November, gained a further 1.2% and was the largest positive contributor to the index. Despite a decline in oil prices of 8.4% in the month, Nigeria held up well.One of the largest contributors was SEPLAT Petroleum that gained 9.5% and offset losses in the banking sector. Another big contributor in the month was Elsewedy Electric from Egypt (12.0%), whilst the biggest detractors were from Kenya, with Safaricom and Equity Bank down 5.9% and 11.1% respectively
• The Fund’s underperformance in the month was mainly due to its overweight Nigerian oil and gas position, which was down 6.3%. The London listing of SEPLAT Petroleum (which is where the Fund has its exposure) declined 4.6% versus the gain in Nigeria. The Fund outperformed strongly in Kenya because Centum gained 9.1% and it doesn’t hold Safaricom. The biggest detractor for the Fund was the Senegalese telephone company Sonatel (-10.5%).

Fund activity

Not many changes have been made to the portfolio’s exposure over the past month. The Fund still has its largest exposure to Egypt, while Morocco remains the Fund’s largest underweight as we view the market as expensive.

What can we expect for the continent in 2019?

Strong growth

According to the October 2018 published International Monetary Fund’s (IMF) World Economic Outlook, we can expect an acceleration of growth for African economies outside of South Africa. Using the weighted size of Africa ex South Africa economies, we expect the aggregate growth to accelerate to 4.2% in 2019.  In contrast, “advanced economies” as defined by the IMF, are expected to slow from 2.1% to 1.5% over the next five years. The below chart highlights the distribution of expected growth for African economies within the global universe as forecast by the Economist Intelligence Unit. African countries with slower growth than the World are typically oil exporting countries, however, the chart illustrates that some of the fastest growing economies are African.

^{Source: Economist Intelligence Unit}

Lots of politics

The Democratic Republic of the Congo took to the polls in December which resulted in the first democratic election of a president since the countries’ first election as an independent nation in 1960. Next and most notably, for the Nigerian election taking place in February, we are expecting a very tight race, but a relatively peaceful transition in Africa’s most populous nation. President Buhari was the first opposition president to take over the government since democracy and campaigned on an anti-corruption platform. Sadly, his economic policies, especially around currency stability, and the low oil prices that prevailed during the early stages of his presidency has seen the economy stumble.

Although not within the mandate of our Fund, the results of the South African elections in May will have an effect on the continent as it will confirm the new administration of President Ramaphosa and we expect his more progressive and business friendly policies to be endorsed.

Many other countries are also holding presidential and parliamentary elections in 2019; Senegal, Algeria, Malawi, Botswana, Cameroon, Mozambique, Namibia and Tunisia to name a few.

Better business conditions

As we have mentioned before, business conditions across the continent have been steadily improving, especially over the past two decades.  According to the World Bank’s ‘Doing Business 2019’ report, Sub-Saharan Africa has been the region with the highest number of business-friendly 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.  We expect this general trend to continue in 2019, although as usual, there will be some countries where business conditions worsen.

We continue to believe that investors should invest a portion of their portfolios over the medium to longer-term in African equities to benefit from this strongly growing region.

Outlook

With equity markets in Africa close to their five-year lows, growth has been 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 central banks are being cautious. The current economic conditions should be positive for equity markets that will also start anticipating generally improved economic outlooks for the continent in 2019 and beyond.