Africa Equity Strategies

August 2021

Strategy Performance

A cautious speech from Federal Reserve Chairman, Jerome Powell, drove stock markets upwards during the month of August. He stated that tapering would not be too aggressive, and that U.S. inflation was under control. His positive comments overshadowed the concerns over Hurricane Ida and the Covid-19 Delta variant.

Emerging markets were positive in August despite concerns over the spread of Covid-19 in Asia. Commodity prices decreased during August as concerns around the spike in the Delta variant threatened to slow the recovery in oil demand. Global bond yields rose slightly in August driven by ongoing concerns over inflation and the reduction of monetary policy support.

Markets across the world were positive during the month of August with African and Frontier markets also performing positively. During the month of August, the S&P 500 was up +3.0% which followed on from the decent performance in July (+2.4% USD). Emerging market performance was up in August and the MSCI EM rose 2.6% USD. The Shanghai SE Composite rebounded after the July weakness and was up 4,3% USD.

African markets were again positive during August, and the MSCI EFM Africa ex-SA index climbed +1.7% USD for the month. Notable performers were BRVM (Francophone West African markets) +4.8% USD, Egypt +3.7% USD, Morocco +3.2% USD, Kenya +1.2% USD, Mauritius 1.9% USD and Nigeria 1.7% USD.

The Adventis Africa Impact Strategy +0.43% USD was up for the month and underperformed its benchmark by 135bps over August. The strategy has outperformed its benchmark since inception (Dec 2014) by 2.1% p.a.

Focus on ESG and Impact Investing

Our ESG methodology is a screening tool used for risk control purposes and has resulted in several positive outcomes for the portfolio over the years. We actively engage with portfolio companies on potential new investment ideas to improve their ESG and Impact performance. We believe that this is a critical role that an investor in African markets can play, whilst benefiting from the emerging global evidence of companies actively engaging in ESG demonstrating superior financial performance. We further suggest that there will be a sustainable correlation between shorter-term ESG engagement, long-term resilience to the impacts of climate change and positive financial performance.

We continuously evaluate the current portfolio holdings by quantifying portfolio performance in six key impact areas with material alignment with the SDGs, being basic needs, wellbeing, decent work, resource security, healthy ecosystems, and climate stability. The scores in these impact areas are being used to inform portfolio construction as well as for risk control and are available on request.

During the month of August, we saw a marked reduction in the carbon intensity of the portfolio. Tonnes of CO2e per US$1mn invested in the strategy has declined by 16% since the end of July. This is because of two portfolio changes that we have made. The first is the replacement of one food producer with another that has a lower greenhouse gas emissions intensity. The second is that we have sold out of an emission intensive extraction company. Both were good examples of portfolio construction being driven by the fund’s mandate of aligning investments with positive contribution to the United Nations Sustainable Development Goals (SDGs), including that of limiting greenhouse gas emissions into the atmosphere towards achieving the goals of the Paris Agreement. Our latest impact metrics are available on request at info@adventis.ltd

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 12.6, PB 5.1, dividend yield of 4.5%, and a ROE of 30.0%. The strategy is well positioned to take advantage of current market conditions.

Market Commentary

Egypt remains one of our preferred markets and continued better macro-economic performance is filtering into ongoing positive stock market performance. The Central Bank of Egypt’s Monetary Policy Committee (MPC) kept key policy rates unchanged for the seventh straight month at its August meeting with the overnight deposit rate, the overnight lending rate, and the rate of the main operation unchanged at 8.25%, 9.25%, and 8.75%, respectively. The Central Bank of Egypt noted that Egypt’s real GDP growth recorded a strong preliminary figure of 7.7% in 2Q21, which demonstrates the sustained recovery of economic activity, as it continues to gather pace and rebound from last year’s trough at negative 1.7%. Egypt is also set to receive USD 2.8 bn from the IMF’s Special Drawing Rights (SDR) allocations which should further support growth.

Kenya is an attractive market experiencing high GDP growth. Within the countries we invest in, we look for economic indicators that give us a sense of economic performance. This month we had two strong indicators out of Kenya. The Kenyan diaspora sent home USD 336.7 mn (Sh36.8 billion) in July, setting a new monthly record for remittances as this beats the previous record that had been set in May when the inflows hit USD 315.8 mn (Sh34.5 billion), before slowing to USD 305.9 million (Sh33.5 billion) in June. The cumulative inflows in the twelve months to July 2021 totalled USD 3.4 billion (Sh376.5 billion ) compared to USD 2.9 billion (Sh317.2 billion) in the same period in 2020, a 20.3% increase.

Nigeria is a challenging market; however, we do continue to find good Nigerian companies for the portfolio. The IMF has approved its largest allocation of Special Drawing Rights at USD 650 bn, which together with a USD 3.35 bn facility should provide some USD liquidity and hopefully contribute to easing of FX restrictions in the medium term. Nigeria’s economy grew by 5.01% y/y in 2Q21 (1Q21: 0.51% y/y), which was the third consecutive quarter of growth since the COVID-19 induced recession in 3Q20 and the highest level of expansion since 4Q14 (5.94% y/y). The GDP growth was primarily driven by the non-oil sector, which grew by 6.74% y/y (1Q21: 0.79% y/y) given the impact of (1) favourable base effects from the prior year and (2) sustained reopening of the economy and contributed 93% to total GDP (vs 91% in both 2Q20 and 1Q21. The oil sector contracted by 12.65% y/y (1Q21: -2.21% y/y) as infrastructural challenges at some of the country’s key oil production terminals continue to affect the sector’s output. According to the Nigerian government, crude oil production averaged 1.61mb/d in 2Q21, 11% y/y lower than 2Q20. The oil sector contributed 7% to total GDP (1Q21: 9%) during the review period, however, remains the most significant source of USD. Nigeria’s headline inflation slowed to 17% y/y in July, which was the lowest since February 2021. The moderation was primarily driven by food inflation which declined to 21% y/y.

Ghana is one of the most exciting markets in Africa, that we are actively seeking to increase exposure in. Ghana is to receive USD 1 bn SDR from the IMF in August, which will be used to support broader economic reforms.

One of the smaller markets in our universe, Botswana, now expects economic growth of 9.7% in 2021, compared with the 8.8% forecast in February, helped by higher diamond sales and a recent rebasing of GDP.

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