Africa Equity Opportunities Fund - May 2019

20 May 2019

Growth is expected to continue for the continent

Summary

• African markets behaved rather strangely in April. Although the MSCI Emerging and Frontier Markets Africa excluding South Africa (MSCI EFM Africa ex SA) index gained 1.7% in the month, this was on a very narrow front driven by the largest five index components. Egypt’s Commercial International Bank is the largest weighting in the index and its 12.9% gain contributed 2.0% to the index gain on its own.
• Morocco is the largest weighted market in the Index and after two weak months it gained 3.6% making it the second biggest contributor to index gains in the period after Egypt. The Fund has no direct exposure to Morocco. Nigerian shares in the index declined 6.0% and were the biggest drag in April.
• The Fund lost some of the stock picking gains it had made in Egypt over the previous quarter, but these were largely offset by gains in Nigeria where the Fund’s shares gained 1.7% in aggregate. The Fund’s lack of exposure to Morocco also contributed to the relative underperformance. Nigerian Oil E&P, Seplat, was the biggest contributor for the Fund in the month.

Fund activity

There were no changes to the Fund’s holdings in the 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.

Overall the Fund underperformed the MSCI EFM Africa ex SA benchmark by 2.3% in the month.

Growth is expected to continue for the continent

Last month we looked at the regional forecasts from the African Development Bank to emphasise how each region and country on the continent has its own unique strengths and economic outlook. Subsequently, the International Monetary Fund (IMF) released its latest (April 2019) World Economic Outlook. In this release, the IMF has not made significant changes to the aggregate growth figures for Africa ex SA, and now includes forecasts for 2024. GDP for Africa ex SA and excluding oil exporters is expected to accelerate to 5.2% in 2019 (as some large economies recover) and to average 5.5% through to 2024. Net-net the GDP growth rates expected for Africa ex SA for 2019 through to 2023 have been reduced by 9 basis points in the latest release compared to October 2018 (and this is just 13 basis points lower than the April 2018 forecasts).

We typically analyse the GDP growth from the IMF into different groupings to show that the Africa Rising narrative has not stalled, as some believe. The graph below shows that the Africa ex SA GDP in the first decade of this century was positively impacted by the period of unsustainably high oil prices and their effect on oil exporting economies, which reflected in the doubling of GDP growth compared to the previous decade. When oil prices subsequently fell, the slowdown in these same economies had a negative impact on Africa’s overall growth that was also impacted by the Arab Spring. This led some to believe that the Africa Rising narrative was an aberration or that it had stalled.

Real GDP growth

^{Source: International Monetary Fund, World Economic Outlook April 2019}

The graph clearly shows the drag that oil exporting countries are expected to have on the continent’s growth and how excluding these, we can expect growth of 5.2% in 2019. Furthermore this strong growth is expected to continue through to 2024. The only African oil exporting country with a meaningful equity market is Nigeria.

We wrote with our January factsheet how the stars are aligning for Egypt and our bullishness has been recognized by the ratings agencies. Moody’s upgraded Egypt’s long term foreign and local currency rating by one notch to B2, while at the same time changing the outlook to stable from positive. The ratings agency justified the upgrade on the “fiscal” improvement seen in addition to a strong nominal GDP growth. This follows on from Fitch’s rating upgrade in March of Egypt's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B+' from 'B', with a stable outlook. Fitch said the decision reflects the progress in implementing economic and fiscal reforms, which was demonstrated in improved key macro indicators, fiscal consolidation, and stronger external finances.   In contrast, Nigeria is struggling to recover from its recession in 2016 and consumer spending is still severely depressed.

Investing across the continent requires a detailed understanding of the trends and drivers of different economies and regions as well as the specific listed companies. There are however very good opportunities in fast growing economies.

Outlook

African equity markets have started the year on a strong note after the December 2018 lows. Meanwhile, growth has been continuing for many of the underlying businesses (we expect 12% earnings growth in aggregate over the next twelve months) and thus there is clearly impetus for significant future returns through active management and stock selection. Lower interest rates should provide further support for valuations, especially in Egypt. 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.