Monthly Highlights: August 2009

•  Attention remains focused on the Nigerian banking sector
•  Kenya retraced amid weaker corporate earnings
•  Nigerian equities dragged down otherwise strong West African performance
•  Southern Africa was broadly higher although Zimbabwe posted loss
 

Attention remains focused on the Nigerian banking sector

Markets underperformed as investors focused on overhaul of the Nigerian banking sector. The Central Bank of Nigeria released the results of its banking sector audit and although a handful successfully passed, the government injected NGN 520 billion into five ailing banks while simultaneously removing their executive officers and publishing a list of individual debtors. The Nigerian interbank market came under significant pressure with 3m NITTY trading 86bp higher on the month. Fortunately, we had some large concerns over the five banks in question and steered well clear of them. Although the Fund’s overall exposure to the Nigerian banking sector remains relatively small (less than 6%), we will be using the current weakness as an opportunity to add to our existing positions. It should be noted that we have already booked some decent trading profits on back of recent events and will continue to monitor the situation closely.

Kenya retraced amid weaker corporate earnings

In East Africa, disappointing earnings from Equity Bank and KenolKobil weighed on Kenyan equity markets as the NSE20 (Kenya) dropped –4.71% on the month. Equity Bank released results with a rise in non-performing loans amid a general slowdown of the Kenyan economy and greater default risk due to the prolonged drought. KenolKobil suffered a –6.67% loss in share price as management could not keep up with rising oil prices with the company suffering heavy losses in exports and aviation. Shifting to Mauritius, the SEMDEX rose +1.24% despite weaker-than-expected earnings from both Rogers & Co and Naiade Resorts. In other action, the Tanzania Composite Index rose by a modest +0.12% while the USE ALSI (Uganda) declined by -5.47% on the month.

Nigerian equities dragged down otherwise strong West African performance

In West Africa, the NSE All Share (Nigeria) declined by -7.46% as the aforementioned banking crisis takes hold. While this may seem relatively sanguine on the whole, NIBOR call rates collapsed by more than 50% as money markets look to price in greater near-term uncertainty. We expect greater downside risk ahead although the recent set of reforms will likely have a confidence inspiring impact which should pave the way for greater foreign interest over the medium-term. In other action, the GSE ASI (Ghana) rose +15.51% and the BRVM 10 (Francophone) climbed by +1.93% on the month.

Southern Africa was broadly higher although Zimbabwe posted loss

In Southern Africa, equity markets were broadly higher as the Gaborone DCI (Botswana), LuSE (Zambia) and NSX Local (Namibia) rose by +5.71%, +3.07% and +0.53% respectively. The ZSE Industrial (Zimbabwe) declined by -7.69% as political risk continues to weigh on market sentiment. Although a post-Mugabe government may appear distant, we are encouraged by recent developments leading up to and including Jacob Zuma’s first presidential visit to Zimbabwe. Certainly, South Africa is poised play a central role in any post-Mugabe transition as fundamental socio-economic linkages between the two nations remain profound. Nevertheless, President Zuma must contend with no fewer than five political factions, each of whom stands a legitimate chance for control in any post-Mugabe government. Interestingly, ANC recognition of the Ndebele faction ZAPU creates an opportunity for Zuma to effect change in Zimbabwe. By calling upon the ANC’s deep tribal ties with the Ndebele, Zuma is forcing ZANU-PF’s Shona members to put aside their underlying Mujuru or Mnangagwa allegiances or risk crossing tribal lines with the Ndebele. Given Zimbabwe’s dependence on South Africa for everything from food to electricity, we view this as a constructive move on the part of President Zuma and we intend to monitor these developments closely.