Monthly Highlights: May 2009

•  African equities continue to recover amid renewed demand
•  East African performance driven by gains in Mauritius
•  Nigeria posted second consecutive month of exceptional performance
•  Southern Africa led by strong returns in Zambia and Zimbabwe
 

African equities continue to recover amid renewed demand

African equities continue their recovery amid renewed demand for EM and commodity-related exposure. Nigeria, Mauritius, Zambia and Zimbabwe were this month’s primary contributors while Southern Africa benefited from yet another round of ZAR-related strength. Despite the sharp drop in export earnings, remittances and direct foreign investment, African economic growth will likely remain positive before picking up notably in 2010. Corporate profitability is largely a derivative of sustained economic growth. In short, we contend that two primary factors will influence the prosperity of African enterprises over the medium-term. First and foremost, frontier economies rely heavily on their ability to raise fresh capital to finance industrial activity. While some countries/sectors will be more successful in their fundraising effort than others, we remain confident in Africa’s ability to attract meaningful foreign investment. Second and perhaps more importantly, frontier economies must employ an effective transmission mechanism which ensures that fresh capital flows efficiently to the private sector in both a consistent and reliable manner. Political credibility, jurisdictional prudence, corporate governance and market transparency must be individually weighed and continuously tested so as to ensure economic integrity and hence derive forward-looking profitability. The Fund now holds a number of equity positions where earnings quality has been afforded an unnecessary haircut due in large part to the risk adjustment away from high-beta assets. Similarly, the Fund has divested itself of positions where country risk premiums do not properly reflect the realities which have come to dominate the current economic climate.

East African performance driven by gains in Mauritius

East African equity market performance was dominated by Mauritius as the SEM-7 rose +26.04% in USD terms during the month of May. Although tourist arrivals and textile exports will likely remain subdued for some time, Mauritian shares continue to trade in line with improving macro fundamentals across Europe, Asia and the US. In Kenya, the NSE 20 rose +1.73% in USD terms as investors digested earnings announcements from the banking sector as well as other key industries. Inflation remains relatively well contained as the Central Bank of Kenya eased rates by an additional 25bps to 8.0%. Nevertheless, the International Monetary Fund (IMF) approved disbursement of a $209 million loan designed to help Kenya overcome the impact of rising food and energy prices. In similar news, the IMF approved a USD 336 million loan for Tanzania with USD 244 million available immediately. On the month, the Tanzania Composite rose +2.9% while the Uganda All Share declined by -0.3%.

Nigeria posted second consecutive month of exceptional performance

West African equity markets exhibited mixed returns in May with the NSE All Share (Nigeria) up +39.09%, BRVM Composite (Francophone) up +0.25% and GSE All Share (Ghana) down -16.4% in USD terms. Nigeria successfully withdrew USD 200 million from the African Development Bank (AfDB) in an effort aimed at shoring up its foreign reserves. Certainly, reclamation of AfDB proceeds played a key role in allowing the Central Bank of Nigeria (CBN) to lift its ban on interbank foreign exchange trading although a sharp rise in the price of crude oil was undoubtedly the determining factor. Nigeria’s foreign reserves are presently USD 45 billion, and while we do not explicitly forecast another round of sharp Naira devaluation, the abrupt -15.1% quarterly decline in reserves implies CBN control will remain firmly in place for some time. In Cote d’Ivoire, the CFA Franc appreciated by +6.54% as the stronger Euro fuelled this month’s +8.97% rally in cocoa prices. Whilst in Ghana, the Ministry of Finance remains engaged in discussions with the IMF for a USD 1 billion loan facility designed to mitigate continued Cedi depreciation and the nation’s rising budget deficit. Certainly, we are concerned about Ghana’s short-term outlook as second round effects from the global financial crisis are likely to have severe repercussions on the nation’s access to external funding. Yet with the Jubilee oil field set to come on line in 2010, we remain optimistic with respect to Ghana’s long-term prospects.

Southern Africa led by strong returns in Zambia and Zimbabwe

Southern Africa performed remarkably well in May with four out of five equity market indices posting strong gains for the month. The ZSE Industrial (Zimbabwe) rose +39.8% in USD terms despite tepid response to country’s appeal for budgetary assistance. To date, the Zimbabwe government has raised USD 35 million in proceeds although it successfully received lines of credit from Botswana, South Africa, PTA Bank and AfDB which amount to USD 1 billion. In Zambia, the LuSE All Share rallied +26.2% in USD terms as copper prices rose +9.0% on the month. We are presently witnessing renewed interest in Zambia as evidenced by recent gains in key counters such as Zain. The Namibia Local Index rose +7.3% in USD terms as the Rand continued its strong run with another +6.9% gain in May. In Botswana, the BSE DCI posted a +4.35% gain in USD terms as the nation attempts to secure USD 1.5 billion in funding to shore up its emerging current account deficit. The Malawi All Share Index declined by -0.7% on the month despite record production and sales from agricultural conglomerate Illovo. Separately, Malawi President Bingu Wa Mutharika stepped up pressure on foreign tobacco buyers for ignoring minimum price floors by openly threatening to revoke purchase licenses. Of note, tobacco accounts for more than 75% of Malawi’s foreign exchange earnings and nearly 80% of domestic employment. Having emerged victorious in this month’s presidential poll and with his ruling Democratic Progressive Party set to control Malawi’s Parliament, Mutharika appears ready to take on a more aggressive stance with the nation’s trade partners.