Africa Equity Strategies

February 2021

Strategy Performance

Financial markets were mixed during the month of February with the S&P 500 +2.6% for the month of February which followed on from the weak performance in January (-1.1% USD). During February markets were strong as confidence grew around the continued rollout of vaccines in the U.S. and U.K. The S&P is now 70% above its lows of 2020 and tech has returned 40% annually for the last two years. We do not believe that this is sustainable and that a correction will come. This should benefit African markets that remain uncorrelated to developed and emerging markets.

Emerging market performance was decent and the MSCI EM rose +0.7% USD for the month of February, which followed on from a positive January (+3.0%).

African markets were mixed during February. The MSCI EFM Africa ex-SA NTR index dropped -1.2% USD for the month. Nigeria -6.2%(USD) and Egypt (-0.51%), two of our larger markets, were very weak. Other Africa markets such as Ghana (+8.6%) and Kenya (+6.3%) closed positively.

The Adventis Africa Equity Strategy -3.16% USD was down for the month and underperformed it’s benchmark by 126bps over February. The strategy has outperformed its benchmark since inception (Dec 2014) by 2.2% p.a.

The top contributors to USD performance for the month were Scancom (20.6%), Sonatel (+16.1%) and Seplat (10.6%). The largest detractors last month were Capricorn (- 21.9%), Nigerian Breweries (-17.5%) and Juhayna (-17.7%).

Focus on Impact Investing

The team continued with their evaluation of the current portfolio holdings with respect to their Impact alignment to the United Nations Social Development Goals (SDGs). We are now using the Cambridge Institute of Sustainable Leadership (CISL) methodology to measure the company and portfolio contribution to impact. The Impact Scores are being used to drive portfolio construction as well as risk control.

This month we revisited the Kenyan telco, Safaricom, and reviewed their contribution to impact as measured by CISL. We generate six scores, one each for basic needs, wellbeing, decent work, resource security, healthy ecosystems, and climate stability.

Our analysis shows that Safaricom would sit in the top quintile in all six categories relative to the MSCI European Index average. It is an impressive and significant contributor toward impact investment. Decent work is the third category identified by the Cambridge Institute of Sustainable Leadership (CISL). For example, Safaricom has 4515 permanent employees, which is 93,912 full time equivalent hours per US$ 1mn invested by the fund. This is a top quintile contribution relative to MSCI Europe and a key contributor to social wellbeing in Kenya.

Strategy Offering Value and Growth

The Adventis Strategy continues to have a quality bias and offers both value and growth with a PE ratio of 14.3, dividend yield of 4.6%, and a ROE of 26.8%. The strategy is well positioned to take advantage of current market conditions.

Market Commentary

On the 18th of February, Africa recorded 100,000 COVID-19-related fatalities, a threshold breached previously in Europe in April 2020. The rise in African cases continues to slow, as total coronavirus cases reached 3.92 million at month-end, a 9.50% increase month-on-month. The historical global vaccination campaign is well underway, as more than 225 million doses have been administered across 100 countries (Bloomberg). The current rate of vaccination is approximately 6.07 million doses per day. The US estimates at their current rate, it will take 10 months to cover 75% of the population with a two-dose vaccine. The UK announced that their objective is to lift all restrictions by the 21st of June. In addition, as the EU ramps up their vaccine rollout, there may finally be light at the end of the tunnel, thus allowing capacity to be directed
towards frontier markets.

China has, to date, been the driving force behind facilitating Africa’s access to the vaccines. Zimbabwe, Mozambique, Senegal, and Tunisia have secured 700,000 doses and are currently prioritising healthcare professionals. South Africa, Seychelles, and Morocco have all undertaken administering the vaccine. Mauritius is aiming for a timeline of mid-2021 for 60-70% of their population to be vaccinated and Ghana was the first recipient of vaccines from Covax, the initiative designed to ensure equitable distribution of the vaccine.

Egypt remains one of our preferred markets in the portfolio. The Egyptian equity market has been very weak in recent months, however there is no fundamental reason for this. Egypt’s non-petroleum trade balance improved 17% y-o-y in 2020 to reach USD38.2bn. Imports dropped 12 % y-o-y to USD63.5bn, partially driven by localisation of some inputs in various manufacturing sub-sectors. Meanwhile, exports fell 1% y-o-y to USD25.2bn. Three export sectors witnessed tangible growth last year: construction materials (+20%), medical industries (+1%) and handicrafts (less than 1%). Remittances from Egyptians working abroad have been surprisingly resilient and reached USD27.1bn in 11M20, up 12% y-o-y. Inflows were up 2.6% y-o-y in November to USD2.6bn. Following a 10.5% y-o-y drop in 2Q20, during the peak of the pandemic, remittances recovered strongly to a record of USD27.5bn in FY19/20.

We like certain Moroccan companies, however, find the market overvalued. Morocco has started its Coronavirus vaccination program and has one of the most advanced vaccination programs on the continent. It received its first shipments of vaccine doses in recent days from China’s Sinopharm and Anglo-Swedish AstraZeneca. Morocco will get 66 million vaccine doses, covering about 80% of its 35 million population.

Morocco’s Bank Al Maghrib extended the lower minimum capital requirements for banks until June 2022. The central bank had lowered minimum capital requirements by 50bps as a policy response to the pandemic. Banks in Morocco must comply with a minimum Tier-1 ratio of 8.5% and a minimum total capital adequacy ratio of 11.5%.

Kenya is an attractive market experiencing high GDP growth. The IMF reached a stafflevel agreement for a USD2.4bn, 38-month long loan programme (EFF & EFC) with Kenyan authorities. Kenya is to raise its debt ceiling, to Ksh 9tn, as headroom for more debt reduces. Public debt crossed Sh7.28bn last December, an equivalent of 65.6% of gross domestic product (GDP), from Sh6.01trn or 58.0% of GDP a year earlier. Central Bank of Kenya (CBK) data shows that diaspora remittances in January grew 7.3% from USD 259.4 mn. Like remittances in Egypt, we have been surprised at how resilient they have been.

Nigeria is a challenging market; however, we find good Nigerian companies for the portfolio. Nigeria saw a surprise exit from recession in the fourth quarter of 2020. Projections from the IMF and the World Bank, pointed towards an exit from recession at the end of 2021. However, Nigeria appears to have beaten the projections of its recovery by one year. The economy grew by 0.11% in the 4Q20 with full year GDP coming to -1.92% against IMF and the World Bank projection of between a 3.25% and 4% contraction. The resilience of the quarter was driven by developments in the non-oil sector as it grew 1.69% in Q4 compared to the oil sector which contracted by 19.76%. While the non-oil sector recorded some improvements in the quarter, both the oil and non-oil sectors, however, closed the year contracting 8.89% and 1.25% respectively, caused by a decline in production to an average 1.56mn barrel in Q4, the lowest since at least 2009. Nigeria’s continued compliance with the OPEC oil production cuts has negatively impacted production. Nigeria revised its debt level target as it approved a new Medium-Term Debt Management Strategy (MTDS) for the period 2020-2023. Targets of the MTDS include (1) 40% maximum total public debt as a percentage of GDP (Previously: 25%), (2) a debt portfolio mix skewed towards domestic debt rather than external debt in the ratio 70:30 (Previously: 60:40), and (3) sustenance of the issuance
of longer-tenor instruments with tenors of 10 years and above, with a ratio of 75:25 for long-term to short-term domestic debt. Nigeria’s revised debt-to-GDP ratio target is still low when compared to IMF’s threshold (55%) for its peers.

Please contact Joseph Rohm (josephrohm@adventis.ltd) should you require any further information.