Monthly Highlights: January 2012

•  West African equities were largely mixed on the month
•  East African equities continued their resurgence
•  Southern Africa was this month's primary laggard
 

West African equities were largely mixed on the month

West African equities were largely mixed as positive returns in Nigeria and the Francophone region were offset by weakness in Ghana. Nigerian performance was exceptionally volatile due to the removal of petrol subsidies which saw domestic fuel prices rise from NGN 65 to NGN 140 on 1 January 2012. When most of the labour unions began striking on 9 January, President Jonathan compromised with a partial removal designed to cap the petroleum price at NGN 97 while agreeing to phase out the remaining subsidies over time. The removal of fuel subsidies has been addressed frequently over the years, and has been a key issue as Nigeria has been implicitly subsidizing all of West Africa’s petrol consumption for years. Despite the obvious long-term benefits to the Nigerian economy, we will continue to monitor input and operating costs as they present a potential forward-looking threat to gains in consumption, price and operating efficiency. On the corporate front, Dangote Cement released inspiring 1Q12 estimates with revenue and PBT expected to rise +27.0% y/y and +38.0% y/y respec-tively. By contrast, PZ Cussons released weaker than expected results with turnover up +20.9% y/y and PAT down -56.9% y/y. Shifting to Ghana, ETI announced the acquisition of Trust Bank in a move that makes it the largest bank in Ghana (in terms of assets) with the largest ATM network and over 70 branches across the country. In other action, Anadarko encountered significant quantities of oil at a deep water well that was originally identified as a gas-condensate discovery and Tullow announced that Jubilee oil sales were largely responsible for the company’s two-fold increase in FY11 top-line revenue.

East African equities continued their resurgence

East African equities continued their resurgence on back of strength in Kenya as inflation softened for the second consecutive month in January. After six consecutive rate hikes that took the Kenya’s benchmark lending rate from 5.75% to 18%, the MPC is likely to take a more neutral stance on inflation as fuel prices decline and the exchange rate stabilizes. On the corporate front, Uchumi Supermarkets delivered stronger than expected 1H12 results as sales and PBT rose +29.3% and 26.0% respectively. By contrast, Kenya Airways and British American Investments issued profit warn-ings whereby FY11 earnings are expected to decline by at least 25.0% y/y. Shifting to Mauritius, GDP growth forecasts continue to be revised downward as the European crisis continues to weigh on the nation’s tourism and manufacturing sectors. In other action, Mauritius Commercial Bank and State Bank of Mauritius weakened amid speculation that the Central Bank is planning to increase competition by granting additional banking licenses. Shifting to Tanzania, the Tanzania Breweries IPO was 145% oversubscribed amid a compelling valuation and strong foreign interest. We expect the company to deliver strong top-line growth as rising volumes and an attractive product mix lead to increased consumption in the months ahead.

Southern Africa was this month's primary laggard

Southern Africa was this month’s primary laggard as weakness in Zambia and Zimbabwe detracted from overall equity market performance. In Zambia, the Ministry of Finance announced that it will rebase the Kwacha by removing three zeros off the currency in order to help reduce costs, ease the cost of doing business and improve transaction times. While this will greatly reduce the risks associated with carrying large volumes of local currency, we are more encouraged by the government’s decision to increase minimum capital requirements as this will result in a more resilient banking sector that is better equipped to manage the nation’s robust economic growth. On a separate note, we are concerned by the government’s recent announcement that an investigation is being conducted into the 2007 partial privatization of Zambia National Commercial Bank. In Zimbabwe, we do not place much weight in this month’s pick-up in headline inflation as it fails to capture real increases in the cost of living. Instead, we find that data compiled by the Consumer Council of Zimbabwe is a far more reliable indicator and implies domestic price appreciation of 6% per month. On the corporate front, bank profitability is likely to remain under pressure as rising NPLs threaten to constrain liquidity and place increased pressure on smaller indigenous players. Shifting to Botswana, we saw strong interest in the Choppies IPO as shares of Botswana’s largest grocery chain were more than 4x oversubscribed. In Malawi, we remain underweight amid concerns over rising inflation, speculation of currency devaluation and risk of rising interest rates.