Africa Equity Opportunities Fund - June 2019

14 June 2019

Summary

• African markets followed the May global market weakness. As many global indices fell by 6% and more, the MSCI Emerging and Frontier Markets Africa (the Index) excluding South Africa Index (MSCI EFM Africa ex SA) was 3.7% weaker in the month. All seven markets in the Index fell with the BRVM (-9.6%), Tunisia (-9.1%) and Egypt (-5.4%) the weakest. Owing to the small allocation to the BRVM and Tunisia however, Egypt was the biggest source of Index weakness. Egypt’s Commercial International Bank is the largest weighting in the Index and its 3.8% decline was the largest individual detractor in the month.
• The Fund had stock picking gains in Egypt and Kenya. In contrast to last month, the Fund’s Nigerian Oil E&P exposure in Seplat and Lekoil were the largest contributors to the losses in May; together these two shares account for the underperformance relative to the Index in May. The Fund’s lack of exposure to Morocco and Tunisia offset some of the relative underperformance.

Fund activity

There were no changes to the Fund’s holdings in the month with its largest exposure continuing to be Egypt, while Morocco remains the 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.

A big new listing in Nigeria and further pain for Zimbabwe

Undoubtedly the most exciting event in African markets in the month was the long-awaited listing of African telecommunications company MTN’s Nigerian subsidiary, MTN Nigeria (MTNN), on the Nigerian Stock Exchange on 16 May. There has been significant pressure for it to list MTNN on the local exchange in recent months. Approximately 20% of the company was already locally owned and had been trading over the counter (OTC) for more than a decade. This meant that the listing could be one “by introduction”, meaning that no new shares were issued by MTNN and no new capital was raised. The listing price was set as the average price traded in the OTC market over the past six months, which was NGN 90 per share.

This price was clearly going to be too low as it pertained to an unlisted instrument. MTNN is the largest telecommunications company in Africa’s most populous country where data and mobile money markets are still nascent, thus providing significant future growth potential for the company. Valuations for the company range from about NGN150 to close to NGN200 per share. Share price movements on the Nigerian Stock Exchange are limited to 10% per day, so after five days of “limit-up” trading, the share price finally peaked at NGN149 per share on 23 May. The significant interest in the listing resulted in just over US$20m trading on average for MTNN per day during this period, compared to less than US$10m per day for the entire market over the previous year. This excitement affected the largest listed company in Nigeria, Dangote Cement, which rallied 12% over the same period on significant liquidity. This gain resulted in Dangote Cement being the largest positive contributor to the Index during May.

 Zimbabwe’s woes continue

In the middle of March the Reserve Bank of Zimbabwe (RBZ) instructed banks to separate client’s accounts into US dollars and Real Time Gross Settlement (RTGS) dollars. These RTGS dollars would be used for all local settlements and included previously issued bond notes as well as other locally derived balances. In effect this created a new currency (ZWL) overnight, which was initially set to trade at ZWL 2.5 per US dollar, but by the end of March it had already weakened to 3.0 per US dollar. Previous estimates for the currency had been to use the price of the dual listed and theoretically fungible Old Mutual shares to indicate the “effective” exchange rate for Zimbabwe. This is typically called the Old Mutual Implied Rate (OMIR).

Even after the new currency was introduced, the Old Mutual share price in ZWL in Zimbabwe continued to trade at a premium to its listing in Johannesburg. The chart below shows this premium as well as the combined effective exchange rate.

The exchange rate has effectively halved from about 5 to the US dollar at the beginning of the year to nearly 10 to the US dollar currently. The Fund has no direct exposure to Zimbabwe.

Outlook

Despite weak equity markets, 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.