Monthly Highlights: April 2012

•  African central banks appear committed to keeping restrictive policy in place
•  West African equities rose on back of strength in Nigeria
•  Kenyan equities continue to outperform
•  North African equities retreated amid deteriorating retail sentiment
•  Zimbabwe continues to suffer amid poor investor sentiment
 

African central banks appear committed to keeping restrictive policy in place

Emerging market liquidity closed in on its recent lows amid heightened EMU-related risk premia, increasingly hawkish US Fed policy and renewed restraint from China. Despite the recent USD rally, investor sentiment remains weak and the scope for a rally in risk appetite appears somewhat limited. We believe that growing opposition to financial austerity in developed markets such as the Eurozone is indicative of public dissatisfaction with mainstream economic and fiscal policy. Should fiscal policy prove ineffective at stimulating growth in developed markets, central banks will be expected to step in and fill the gap. This will increase the risk of monetary policy error as global capital markets price in wider breakevens reflecting greater uncertainty surrounding the future path of inflation. Despite the vastly improved inflationary outlook for Africa, such a scenario may limit the scope for future easing as African central banks seek to avoid the dovish label by keeping restrictive measures in place for longer than otherwise expected.

West African equities rose on back of strength in Nigeria

West African equities rose on back of strength in Nigeria as we digested financial results from a number of key corporates. Nestle Nigeria (T/O: +40.7% y/y; PAT: +140.1% y/y) reported exceptional 1Q12 results as the company benefited from large capacity gains due to recent upgrades at its Agbara factory. As expected, results from Unilever Nigeria (T/O: +7.9% y/y; PAT: -18.1% y/y) and PZ Cussons (T/O: +15.4% y/y; PAT: -83.0% y/y) underperformed as rising input costs and higher taxes weighed on margins. Further, the entire Nigerian consumer goods sec-tor was forced to contend with the January labour strike, security problems in the North and an overall decline in discretionary income (due to the partial removal of fuel subsidies). Within the banking sector, Access posted strong 1Q12 results which for the first time included the Intercontinental acquisition. Although premature, this acquisition could prove highly successful as Access acquired nearly NGN 600bn of assets for a purchase price of NGN 10bn. Although we were disappointed by 4Q11 provisioning at UBA, Zenith, FCMB and Skye, these four banks reported generally strong 1Q12 results. In the case of FCMB, restructuring charges related to the FinBank acquisition are expected to weigh on earnings over the next few quarters although it is effectively starting with a clean slate. In the case of Skye, management must succeed in improving net interest margins by diversifying its funding mix away from more costly term deposits. UBA also posted strong 1Q12 results although the bank’s net interest margins remain well below the peer group average.

Kenyan equities continue to outperform

East African equity markets continued their ascent as Kenya continues to outperform amid an improved inflationary backdrop. Headline inflation declined 255bp from 15.61% y/y to 13.06% y/y in April as food prices continue to moderate. Although an unwinding of base effects was the primary reason for this month’s decline, energy prices weakened as the rains led to improved hydro-electric generating capacity and reduced demand for more expensive fuel. On the earnings front, Scan Group reported FY11 results (T/O: +3.5% y/y; NI: +42.2% y/y) as East Africa’s largest advertising and media company by sales took advantage of increased ad spending from multinationals. Looking ahead, we expect the company’s multi-agency model to prove increasingly resilient as it embarks upon its Pan-African expansion plan. In Tanzania and Uganda, inflationary pressures have begun to subside as food and energy prices moderate. Nevertheless, we expect monetary policy to remain hawkish over the near-term as evidenced by Uganda’s decision to leave rates on hold despite a 450bp decline in headline inflation from 25.7% to 21.2% y/y.

North African equities retreated amid deteriorating retail sentiment

North African equities retreated on back of deteriorating retail sentiment in Egypt as local buying continues to diminish amid an increasingly negative political and economic backdrop. Egyptian companies are reluctant to commit long-term expansionary capital and will remain on the sidelines until a new president and constitution are in place. With presidential elections expected to commence next month, we will be watching for indication as to the timeframe for drafting of a new constitution and the committee responsible for its implementation. In our view, one of the primary risks to the nation’s outlook is affording too much power to specific groups with extreme ideologies. On the corporate front, OCI announced the terms surrounding demerger of the company’s construction business from its fertilizer business. While the fertilizer business will embark upon a relatively straight-forward operating strategy, we are actively seeking insight into management’s plans for the construction group. A strategic acquisition is not without question as management may attempt to replicate its successful cement and fertilizer models by developing a new business in-house.

Zimbabwe continues to suffer amid poor investor sentiment

With the exception of Zimbabwe, Southern African equities were relatively unchanged on the month. In Zimbabwe, the market continues to suffer as political uncertainty, indigenization, power outages and liquidity constraints weigh on investor sentiment. Yet despite the challenging local environment, Econet (EBITDA: +19.9% y/y; PAT: +17.5% y/y) reported strong FY12 results as subscribers rose +16.3% y/y with ARPU up +5.6% y/y. Delta Corp (T/O: +36.0% y/y; PAT: +39.0% y/y) also reported strong FY11 earnings as new capacity drove a +19% y/y rise in volumes amid strength in the company’s lager and soft drink segments. In Malawi, Bingu Wa Mutharika died unexpectedly with VP Joyce Banda assuming the role of President. Banda wasted little time in reshuffling the nation’s cabinet while announcing her intention to devalue the Kwacha and unlock IMF assistance. Banda emerges as Africa’s second female president and her ascendance was quickly rewarded by The World Bank which pledged funds to help ease the impact of recently policy changes.