Monthly Highlights: December 2011

•  2011 proved to be a challenging year for most African strategies and investors
•  West African equity markets were largely mixed
•  East African equities rallied on back of strength in Kenya
•  Zambian strength fuelled Southern Africa equity market outperformance

2011 proved to be a challenging year for most African strategies and investors

African markets exhibited mixed performance in December as the MSCI Emerging Markets and MSCI EFM Africa ex-South Africa Indices retreated by -1.2% and -2.4% respectively. In what has been a challenging year for most strategies and investors, we remain confident that our fundamental bottom-up approach will guide us in discerning the most profitable African opportunities ahead. Looking back on 2011, we maintained healthy exposure to directional views across a number of core markets that have fallen precipitously as liquidity events and political headlines resulted in large price dislocations and increased risk aversion. We have long advocated that investors focus on real assets and long-term price appreciation. Over the short-term however, increased macro uncertainty has forced us to pay close consideration to those companies which exhibit inelastic demand for finished goods and services. Similarly, we remain mindful of companies operating in industries where price pressures may lead to higher input costs and place future earnings growth at risk.

West African equity markets were largely mixed

In Nigeria, the NSE ASI rose by +3.0% in December as it finished the year off -21.6%. Despite Christmas Day bombings that claimed more than 40 lives across three cities and forced President Jonathan to declare a state of emergency in parts of the North, equities finished the year on a strong note as bank shares fueled market performance. Despite the aforementioned incident, S&P upgraded Nigeria's economic outlook and may consider raising its credit rating amid legislative changes designed to better channel resources toward the nation's development; most notably, the suggested removal of fuel subsidies which currently account for roughly one-third of Nigeria's budget. While there are many other suggested reforms that have the potential to improve Nigeria's economic outlook significantly (i.e. privatization of the power sector, creation of a sovereign wealth fund, consolidation of the banking sector, etc.), continued progress will undoubtedly result in heightened political tension over the coming months. Shifting to Ghana, the GSE ASI fell by -0.3% in December as it finished the year down -9.9%. On the macro front, the Central Bank of Ghana kept interest rates on hold as rising gas prices are expected to fuel inflation over the coming months. We elected to take up our rights in Guinness Ghana as shares rose +1.5% in December amid generally healthy sentiment surrounding the brewer's forward-looking growth prospects. In the Francophone Region, the BRVM Composite Index declined by - 5.4% in December as it extended its annual loss to -15.7% on the year. Cote d'Ivoire successfully completed its first post-war elections as President Ouattara's RDR party won the majority of seats in Parliament on back of his support for a number of key reforms, including plans to overhaul the nation's cocoa industry, dissolve regulatory agencies and invest in infrastructure. Nevertheless, investor sentiment toward the region remains weak as Ouattara's government has yet to make good on defaulted coupon payments to foreign investors. Further, Senegal is moving into an election year with President Wade campaigning for another term amid rhetoric regarding higher taxes and increased nationalization. This has taken its toll on shares of Sonatel which finished the year down -24.7% and are presently trading at levels last witnessed in early 2009.

East African equities rallied on back of strength in Kenya

In Kenya, the NSE 20 posted a +7.1% December rally in what has otherwise been an extremely volatile year for the East African economy. In December, the Central Bank of Kenya raised its benchmark interest rate by 150bp to 18.0% despite an astounding reversal in USD/KES that has resulted in Shilling appreciation of +19.9% since its mid-October low. It should be noted that USD/KES moved from 79 in January to 107 in October before closing the year at 85. EABL and Safaricom rose +13.4% and +11.1% primarily on back of currency-related strength. Equity Bank failed to participate in this month's rally as its shares slid -1.2% whilst Barclays Kenya continued its stellar run as the bank's shares rose +15.2% in December. Shifting to Mauritius, the SEM-7 rose +1.4% in December as it finished the year down -1.3%. Despite relative market outperformance, we are cautious on Mauritius' 2012 outlook as the economy remains tightly correlated to the tourism sector which relies heavily on European visitors. Despite rising +8.8% on the month, shares of bellwether New Mauritius Hotels fell by -22.1% on the year. Our preferred play remains the Mauritian financial sector as the island nation's status as a leading offshore banking centre continues to garner global acceptance. Shares of Mauritius Commercial Bank and State Bank of Mauritius rose +0.7% and +1.9% in December to finish the year up +5.8% and down -2.4% respectively. In Tanzania, the DSEI had a strong run into year end, with the index gaining +6.3% in December to close the year at +6.5%. In so doing, Tanzania qualifies as East Africa's best performing market. Yet despite its regional outperformance, thin trading volumes and stringent foreign ownership restrictions make for a generally challenging investment climate. In Uganda, the USE ASI rallied +10.7% in December as the index declined by -32.0% on back of rising inflation and currency-related weakness.

Zambian strength fuelled Southern Africa equity market outperformance

In Botswana, the Gaborone DCI slid by -0.3% in December as it finished the year off -6.2%. The banking sector posted positive gains as shares of FNBB and Barclays rose +3.1% and +7.6% respectively on the year. Although shares of Letshego rose +1.7% in December, the leading microfinance lender has been weighed down by legislative wrangling that may impair the company's credit outlook. This news caused its share price to fall by -29.5% on the year. In Zambia, the LuSE ASI rose by +10.2% in December, as it solidified its position as Africa's best performing equity market – up +18.3% for the year. Performance was driven by shares of ZANACO as this month's +27.2% gain supported a +54.2% return for the year. Shoprite Zambia posted a lofty +74.9% gain on the year and small caps Puma Energy and African Explosives performed exceedingly well with gains of +176.1% and +107.3% respectively in 2011. Shifting to Zimbabwe, the ZSE Industrial Index rose +0.6% in December to finish the year down -3.6%. After an impressive start to the year, Zimbabwe's equity markets changed direction in mid-March as political saber rattling deterred investors. On the year, shares of Delta rose by +7.7% while telecom bellwether Econet fell by -16.1%.

  • Bermuda +1 441 278 7610
  • UK +44 20 7101 9290
  • South Africa +27 11 243 9054

© Altree Capital ("ACL")

   Terms and Conditions