Monthly Highlights: January 2011

•  Despite political headwinds, Nigeria and the Francophone region performed well
•  East African equities exhibited broad-based strength
•  Southern Africa performed well on back of continued strength in Zimbabwe
 

Despite political headwinds, Nigeria and the Francophone region performed well

In West Africa, performance was driven by the NSE ASI (Nigeria) and BRVM Composite (Francophone region) which rose +8.21% and +5.77% respectively. In Nigeria, the People’s Democratic Party (PDP) nominated President Goodluck Jonathan as their candidate in the forthcoming presidential elections. We view this as positive given that Jonathan’s re-election will ensure the overall continuity of newly instituted reforms across the financial, power and oil sectors. In other news, Nigeria’s inaugural USD 500m Eurobond was 2.5x oversubscribed with a yield-to-maturity of 7% and coupon of 6.75%. The bond started trading on 24th January at 100.046 although it closed the month at 98.8214. The Central Bank of Nigeria (CBN) remains hawkish as it tightened the Monetary Policy Rate (MPR) by 25bp to 6.5%. Of note, the CBN also increased the cash reserve requirement (CRR) for banks by 100bp in an effort aimed at absorbing excess liquidity from the system. Although the CBN has performed admirably in its efforts to control rising prices, Nigerian inflationary pressure is mostly structural and largely exogenous. On the corporate front, the market digested consumer sector earnings as PZ Cussons posted a 3% rise in PAT for 1H11. Although these numbers are somewhat disappointing, most of the company’s full-year earnings are traditionally generated in the 2nd half. As such, we are looking for higher y/y results from PZ Cussons in 2H11. By contrast, Dangote Sugar posted a -20% decline in PAT as the company struggled to pass on the recent sugar price increase to the end consumer. In the Francophone region, political upheaval in Cote d’Ivoire was largely overlooked amid this month’s uprisings in Tunisia and Egypt. Yet the political impasse continues as Cote d’Ivoire has now officially defaulted on the coupon payment for its sovereign Eurobond issue. Although the African Union continues to mediate, our local sources contend that there could be a prolonged battle for power with no real end in sight. We believe that Gbagbo is holding out for true immunity and is likely to remain entrenched until he can no longer pay the army and civil servants. Of more immediate concern, the Central Bank of West African States (BCEAO) was forced to close its offices in the nation’s capital of Abidjan. Shifting to Ghana, the GSE ASI declined by -0.42% although the cedi came under significant pressure and lost -5.23% of its value versus the greenback. On a positive note, Unilever Ghana released very strong FY10 results with revenue up +10.6% as a result of the company’s improved marketing strategy whilst greater cost efficiencies generated PAT growth of +445.9%.

East African equities exhibited broad-based strength

East African equities exhibited broad-based strength as the SEM-7 (Mauritius), NSE 20 (Kenya), DSEI Composite (Tanzania) and USE ASI (Uganda) rose +10.49%, +0.35%, +1.67% and +2.49% respectively. In the Kenyan telecommunications sector, the price war continues as Airtel lowered ‘on-net’ call rates by a whopping 66.7%. This led to outcry from competing operators and resulted in the Communications Commission of Kenya (CCK) announcing that matters of cost structure, profitability and business models may be determined by the operator with the caveat that it must clarify whether pricing is a short-term promotion or long-term price adjustment. Recent events have certainly caused a great deal of concern surrounding Safaricom’s earnings outlook with the stock falling by -8.5% to a new 12-month low of KES 4.30. Separately, East African Breweries announced that it will outsource its distribution to DHL in an effort aimed at further cutting costs. Although the company’s shares rose to an all time high of KES 227 during the first week of January, they have recently suffered from increased profit taking as speculation surrounding higher taxation and prohibitive regulation threaten to reduce overall consumption. The revised alcohol control laws limit advertising and promotions, drinking hours and distribution channels (e.g. supermarkets). Shifting to Rwanda, Bralirwa’s highly touted IPO came in 1.74x oversubscribed although foreign participation was nearly 4.3x oversubscribed. The stock listed at RWF 136 on 31st January and rose +72.8% to RWF 235 on its debut.

Southern Africa performed well on back of continued strength in Zimbabwe

Equity markets across Southern Africa were equally resilient as the ZSE Industrial Index (Zimbabwe), LuSE ASI (Zambia), Gaborone DCI (Botswana) and MSE Domestic (Malawi) rose by +6.5%, +2.18%, 1.41% and 0.5% respectively. On the negative front, the NSX Local (Namibia) declined by -7.2% in January. The ZSE Industrial Index forged ahead despite ZANU calling for 2011 elections and deploying soldiers to rural areas across the country. Shifting to Zambia, Stanchart released a strong set of FY10 results as PAT grew +84.7% on the year. Nevertheless, interest rates continue to fall and this coupled with comments from Government regarding lending rates, makes us believe that margins will come under pressure in the Zambian banking sector in 2011.