Monthly Highlights: June 2013

•  Performance suffered as dedicated emerging market fund flows rolled over and foreign selling picked up
•  West African equities retreated amid broad-based weakness across the region
•  East African equities retreated as weakness in Kenya and Mauritius weighed on portfolio performance
•  North African equities declined as events in Egypt took center stage on a global scale
•  Southern African equity markets rose as strength in Zambia, Malawi and Botswana fueled this month’s gains
 

Performance suffered as dedicated emerging market fund flows rolled over and foreign selling picked up across our most liquid markets

We capitalized on this month's weakness by adding to a number of core holdings while increasing our weightings in Kenya as the nation continues to emerge following March’s general elections which culminated in Kenyatta’s ascension to the presidency. From a sector perspective, mining and financials were responsible for most of the downside whilst energy and industrials held up relatively well. Egypt stands out as our primary concern, and while short-term gains are all but assured, third-party intervention in the nation’s political process has set a disturbing precedent that may be difficult to shed. We believe Egyptian equity risk premiums must re-rate higher as the nation’s structural problems, i.e. a growing population with high and rising unemployment, soaring debt levels, and insufficient food supplies, cannot improve without clear and credible leadership. Although we are comfortable with our current exposure, we are closely monitoring events in Cairo as elevated uncertainty often results in compelling buy opportunities.

West African equities retreated amid broad-based weakness across the region

Despite overall softness, we remain encouraged as the region offers significant scope for medium-term upside. In Nigeria, Oando reported weak 1Q13 results (T/O -23.7% y/y: PAT -19.1% y/y) largely due to a drop in volumes in the downstream business, and a 5% y/y fall in the price of Bonny Light. On the consumer front, Cadbury Nigeria disclosed a US$130m upgrade to its facility in an effort aimed at improving the margins for its flagship product, Bournvita. Although Bournvita appears to be gaining lost ground on Nestle’s Milo in its bid to reclaim the top spot as Nigeria’s leading food drink, the company’s shares remain overvalued in our opinion. In financials, Diamond Bank formally launched its “branchless banking” service BankOne, one of Nigeria’s leading electronic payment platforms for microfinance and mortgage lending. Diamond’s new mobile banking application provides instant account opening and registration, and the bank has deployed agents armed with mobile phones to push the product across the streets of Lagos. It should be noted that Diamond is looking to raise US$550m in Tier II capital although softening demand for EM debt may force management to adjust expectations downward. Shifting to Ghana, economic growth slowed from 10.3% in 1Q12 to 6.7% in 1Q13 to 6.7% as the nation’s ongoing power crisis has restricted manufacturing activity. In the Francophone region, Palm CI reported disappointing 1Q13 earnings (T/O: -26.2% y/y; PAT: -35.0% y/y) as margins declined amid -17% and -37% price declines in crude palm and palm Kernel oil, respectively. On a positive note, SocGen CI reported strong FY12 performance (G/E +12.1%: PAT +46.3% y/y) as provisioning declined and commissions rose.

East African equities retreated as weakness in Kenya and Mauritius weighed on portfolio performance

On the consumer front, East African Breweries Limited expects growth in spirits to outpace beer despite an overall slowdown in consumption over the first four months of the year. In materials, Bamburi and ARM should benefit from improving economic growth, strong cement prices and relatively high barriers to entry. Despite the challenges faced by high transportation and electricity costs, we are growing increasingly bullish on the industry’s forward looking potential. In Tanzania, Sumitomo has agreed to build a 240MW gas-fired power plant, as the government attempts to ease the burdensome impact of power shortages and reignite economic growth. Shifting to Mauritius, MCB is issuing US$10 – 15m in floating-rate subordinated notes to shore up its capital base as the group proceeds with its re-organisation. In other news, the Reserve Bank of Mauritius unexpectedly cut rates by 50bp amid sluggish economic conditions and an outright contraction in construction activity.

North African equities declined as events in Egypt took center stage on a global scale

Although heightened political uncertainty is likely to weigh on economic stability over the medium-term, we do not believe Egypt will be mired in perpetual stagnation. On the contrary, the forced removal of President Morsi supports our view that the Egyptian military is not only alive, but formidably in control of Egyptian politics. This forms the foundation for our long-term bullish view as modern Egypt was effectively founded in a coup by Colonel Gamal Abdel Nasser, who in turn, used the military to bring about economic change and development. While the players may have changed, the responsibility for shaping Egypt’s economy will once again reside with the military. We believe that when viewed within the context of Egypt’s economic progression over the second half of the last millennium, there is indeed sufficient scope for optimism. On the corporate front, Juhayna successfully signed a US$10m loan to finance expansion of its distribution and sales fleet. The company currently has 26 distribution centers and a fleet of over 1,000 vans and trucks across Egypt.

Southern African equity markets rose despite weakness in Zimbabwe as strength in Zambia, Malawi and Botswana fueled this month’s gains

In Zimbabwe, mounting uncertainty surrounding the upcoming general elections weighed on sentiment and led to increased profit taking on the part of foreigners. On the earnings front, OK Zimbabwe reported encouraging FY13 numbers (T/O: +16.3% y/y; PAT: +20.1% y/y) as management attributed the company’s results to improved in-store facilities and more effective promotional activities such as the OK Grand Challenge. In Botswana, the central bank cut its lending rate by 50bp to 8.5% as inflation slowed to 6.1% from 7.2%. In Zambia, Zambeef reported improved 1H13 results as the company returned to profitability (T/O: +24.17% y/y; PAT: +369 y/y) after including the US$9.7m provision for tax assessment. Management attributed the company’s results to strong growth in the cropping (+76%) and edible oils (+70%) divisions.