Monthly Highlights: October 2009

•  Strong performance despite increased profit-taking across the West & Southern Africa regions
•  East Africa strength led by gains in Mauritius and Kenya
•  West Africa remains constrained by weak investor sentiment in Nigeria and Ghana
•  Southern Africa was broadly weaker as equity markets retraced last month’s positive gains
 

Strong performance despite increased profit-taking across the West & Southern Africa regions

The Fund performed well in October despite increased profit-taking across the West and Southern African regions. In East Africa, Mauritius continued its winning streak and Kenya rebounded nicely. The portfolio profited from positions in Malawi and Zimbabwe as foreign interest appears to be gaining traction. On a relative basis, the Sub-Saharan Africa (SSA) region offers some of the most attractive price-to-earnings multiples in the world with trailing 12-month country P/Es ranging from a high of 14.9 in Zambia to a low of 7.0 in Namibia. SSA currencies continue to appreciate as inflation remains under control amid higher energy prices and deterioration of the global monetary base. Even heavily price-sensitive nations such as Ghana are reaping the benefits of moderating inflation. Ghanaian CPI has now declined for the third consecutive month and dovish sentiment is fuelling speculation of the nation’s first rate cut in more than three years. The month of October saw parliamentary elections in Botswana, Mozambique and Tunisia come and go without incident, the recently-contested Gabon election upheld in constitutional court, and historically-divisive Madagascar made significant progress en route to a consensus transitional government. Nevertheless, slower economic growth is an increase in crime across the continent from violent protests around Johannesburg to isolated acts of extreme aggression in Guinea and Darfur. World Bank VP for Africa Obiageli Ezekwesili believes Africa’s growth has slowed to a “calamitous” level of +1.2% y/y and fears that rising levels of crime and hunger could lead to increased political instability in the years ahead. Although increased political risk is a factor which must be carefully considered, we do not foresee it as having a meaningful impact on the equity premiums for many of the larger and more established nations in our universe. In fact, we are presently witnessing a rebound in the level of foreign direct investment (FDI) as solid corporate earnings have led to a spate of successful private equity and debt placements throughout the region. Given that the level of African FDI will have most likely halved in 2009, its eventual increase will prove crucial to the region’s recovery in 2010.

East Africa strength led by gains in Mauritius and Kenya

In East Africa, equity market performance was again led by Mauritius as the SEM-7 rose by an additional +1.75% following last month’s mammoth +15.58% gain. Inflation remains at multi-year lows as strong corporate earnings and continued Rupee appreciation fuel a rebound in sentiment. In Kenya, the NSE 20 rose by +1.74% amid renewed foreign interest in the East African stalwart. The highly anticipated KenGen bond issue came in 77% oversubscribed as the nation’s largest power company raised an additional USD 133 million (USD 333 million in total) for its plans to increase its generating capacity by 500 MW through 2012. Bamburi Cement exited its 15% stake in Athi River Mining as parent company Lafarge sees increased potential for organic expansion (i.e. construction of Bamburi’s third cement plant in Kenya, doubling of Uganda production capacity, et al.). On the negative front, James Finlay Kenya Ltd (Africa’s second largest buyer of tea in 2008) closed its Mara Mara tea-extracts factory as sales had been adversely impacted by the economic downturn and increased competition from lower cost producers. Of note, Kenyan tea production declined to a five-year low in 2009 primarily as the result of a prolonged drought. In other action, the Tanzania DSEI retreated by - 1.03% and the Uganda ASI declined by -0.66% on the month.

West Africa remains constrained by weak investor sentiment in Nigeria and Ghana

In West Africa, performance remains constrained by Nigeria as the nation’s troubled banking sector weighs on overall market sentiment with the NSE ASI dropping - 1.87% for its fifth consecutive monthly decline. Following the release of this month’s Central Bank of Nigeria (‘CBN’) audit, we believe the Nigerian banking system is well positioned for future growth. Although more than USD 4 billion has already been injected into the country’s banking sector, we are encouraged by recent developments, including CBN Governor Sanusi’s announcement that the Nigerian Economic Crimes Unit has successfully recovered USD 774 million from outstanding debtors. Looking ahead, the sector will likely see increased consolidation with FBN, Zenith, UBA and GTB increasing their already dominant market positions. On a separate note, Nigerian cocoa shipments rose 48% in August as the sector benefited from protests by farmers in Cote d’Ivoire. In Ghana, the GSE ASI slipped - 13.43% as numerous factors conspired to drag down overall market performance. First and foremost, the impending deadline for Ghanaian bank recapitalisation has caused a significant drain on market liquidity as participants focus on strategic positioning ahead of fundraising exercises. Secondly, President John Atta Mills’ Ghanaian Commission recommendation that the government “renegotiate” its sale of Ghana Telecommunications on the premise that the national fibre-optic cable system should have been separated from the transaction. In short, the Commission found the system’s sale price to be “grossly undervalued” amid a “series of complicated financial arrangements”. Yet when taken in conjunction with the government’s amateurish approach to Kosmos Energy’s sale of the Jubilee Oil Field, foreign investors are beginning to scale back their level of interest in the West African nation. In other action, the BRVM Composite (Francophone) rose by +0.74% amid generally muted interest from investors.

Southern Africa was broadly weaker as equity markets retraced last month’s positive gains

In Southern Africa, performance was broadly weaker on the month with the Gabarone DCI (Botswana) down -0.97%, NSE Local (Namibia) down -3.34%, LuSE ASI (Zambia) down -3.57% and ZSE Industrial (Zimbabwe) down -5.72%. The region’s lone bright spot in October was Malawi as the MSE DCI rose +2.07% amid slower inflation and the projected impact of increased uranium exports. Nevertheless, the nation’s foreign exchange shortage has yet to subside as low tobacco earnings and large fuel & fertilizer costs weigh heavily on the MWK. Despite expectations for significant Kwacha depreciation (approx -30% decline over the next two years), Malawi’s current account deficit should narrow substantially on the back of rising uranium exports and weaker import growth. Shifting to Zambia, the government named eight groups to participate in the sale of a majority interest in state-owned fixed line operator Zamtel. We suspect ZMK is poised to appreciate notably as this share sale combines with increasing expectations of higher base metal prices and exports. Of note, China reopened its non-ferrous Chambishi copper smelter amid similar findings.