Monthly Highlights: June 2010

•  Increased volatility amid generally thin trading volumes
•  East African equity markets rose on back of renewed strength in Kenya and Mauritius
•  Investor sentiment in Zimbabwe remains subdued
 

Increased volatility amid generally thin trading volumes

West African equity markets retreated in June as the NSE ASI (Nigeria), BRVM Composite (Francophone) and GSE ASI (Ghana) declined by -1.86%, -5.15% and -8.90% respectively. In Nigeria, increased foreign selling as the result of declining global equity markets led to deteriorating investor sentiment ahead of FY10 interim earnings season. Senate approval of the widely anticipated Asset Management Corporation of Nigeria (AMCON) bill failed to invigorate the NSE amid increasing concern that it may not receive executive approval by President Jonathan. AMCON is critical to the continued restructuring of Nigeria’s banking sector as it is widely believed the entity will issue bonds as cashless swaps to eligible banks in exchange for non-performing loans. Looking ahead, we are encouraged by this month’s announcement from the Nigerian Ministry of Finance that external public debt as of March 2010 was USD 4.3 billion (2% of GDP) and believe the nation is well positioned for its proposed USD 500 billion Eurobond issue. Shifting to Ghana, inflation continued its descent with the headline figure declining from 11.7% y/y in April to 10.7% y/y in May. Given the Bank of Ghana’s apparent willingness to ease monetary policy, we expect inflationary headwinds to deteriorate further in the coming months. Moreover, we are encouraged by Ghana’s improving balance of payments as higher export earnings (from gold and cocoa primarily) combine with lower fuel costs to reduce the nation’s current account deficit. With oil production set to come on line in Q4/10, our projections for Ghana’s external position have strengthened considerably in recent months.

East African equity markets rose on back of renewed strength in Kenya and Mauritius

East African equity markets were generally positive on back of gains in Mauritius and Kenya with the SEM-7 and NSE 20 rising by +5.81% and +0.13% respectively. In Kenya, the equity market was buoyed by several positive earnings announcements with Safaricom reporting a +43.8% rise in FY10 earnings, Centum reporting a +249.5% rise in earnings and Kenya Airways announcing its return to profitability. We also saw the release of Kenya’s fiscal budget (6.8% of GDP) with the deficit widening by a wider than expected margin on back of increased government expenditure (up +30% y/y). Despite the unanticipated rise in Kenya’s public debt, the nation’s outlook remains encouraging given rising domestic demand, expanding manufacturing output and declining inflation. Although political risk remains a concern ahead of next month’s referendum, we take particular note of the export-driven horticulture industry which has served as a further catalyst to the ongoing recovery across Kenya’s agricultural sector. In other action, the DSEI (Tanzania) and USE ASI (Uganda) declined by -1.91% and -0.80% respectively on the month. Shifting to Tanzania, we believe that the nation’s fiscal policy stance will be less expansionary given expectations for a 25% increase in government expenditure and increasingly unrealistic revenue targets given the sluggish pace of collections. In addition, commercial financing of the budget deficit will raise the cost of public debt and may well call into question the nation’s debt sustainability. After nearly halving over the two year period through FY07 (from 58% to 31% of GDP) as the result of international debt relief programs (HIPC and MDRI), Tanzania’s budget deficit will resume its expansion and thus has given us room for pause.

Investor sentiment in Zimbabwe remains subdued

In Southern Africa, we saw positive performance outside of Zimbabwe with the LuSE ASI (Zambia) up +3.26%, Gabarone DCI (Botswana) up +1.31% and MSE DCI (Malawi) up +0.22% in June. In Zimbabwe, indigenisation concerns continue to weigh on investor sentiment with the ZSE Industrial Index off -1.81% and ZSE Mining Index falling by -10.17% on the month. In Zambia, we believe the correlation between copper prices and the Kwacha has begun to re-establish itself after breaking down late last year. Should the bullish reports surrounding 1H/10 copper shipments prove accurate, FDI financed through retained earnings of copper mines should prove considerable. A bullish outcome seems likely as the Bank of Zambia has already begun tightening money market liquidity as evidenced by the +112.2% increase in 91day yields over the two month period through June. Generally speaking, the macroeconomic environment in Zambia remains strong overall with forecasted FY10 growth of 6.0% and inflation rising at roughly 8.0% y/y.