Africa Equity Strategies

June 2020

Strategy Performance

Financial markets volatility persisted over the month of June. Following a surprisingly good May unemployment report, on Monday 8 June the S&P 500 closed roughly where it started the year, after a remarkable round trip. The fastest stock market collapse on record was followed by the fastest recovery. As the month progressed, markets became nervous about a second Covid-19 wave in the U.S and the S&P 500 was unable to hold onto its gains and closed down 4.0% year to date. The S&P 500 +1.8% was however up for the month of June.

The “Fed Put”, the widespread belief that the US Federal will always rescue the US economy by decreasing interest rates, has resulted in a weaker US dollar. The weaker US dollar has led to a recovery in Emerging Markets with the MSCI EM +7.0% USD for the month of June. After outperforming both the S&P 500 and other EM indices in May 2020, the MSCI EFM Africa ex-SA NTR index lagged at +0.7% USD for the month. Nigeria -3.0% gave back some of its May (+9.8% USD) outperformance whilst Morocco +4.1% and Egypt +4.6% USD were particularly strong.

The Adventis Africa Equity Strategy +1.01% USD benefitted from its overweight position in Egypt. The strategy has outperformed its benchmark since inception (Dec 2014) by 3.5% p.a.

The top alpha contributors to USD performance for the month were Lucara Diamonds (+49.8%), Nestle Nigeria (+26.6%) and Brasseries Du Maroc (+17.0%). Having been the largest alpha contributor last month, Nigerian Breweries (-16.4%) gave up some of its gains. Other alpha detractors from USD performance were the overweight positions in Custodian and Allied (-12.5%) and Stanbic IBTC (-15.3%).

Focus on Impact Investing

The team has worked on evaluation of the current portfolio holdings in terms of their Impact alignment to the United Nations Social Development Goals (SDGs). The Social Development Goals are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace, and justice. The 17 Goals are all interconnected, and to leave no one behind, it is important that we achieve them all by 2030. The United Nations has set 2030 as the timeline for us to achieve these Goals. We have now scored almost 60% of the portfolio in terms of alignment with the SDGs. In future, the Impact Scores will be used to drive portfolio construction.

In the current portfolio, East African Breweries (EABL) has the highest score for achieving against the 17 Social Development Goals as it has set active targets for eight of the SDGs that it is successfully achieving. EABL scored highly for SDG 2, Zero Hunger, where it met its target to have 80 percent of its raw material sourced locally. For SDG 7, Affordable Energy, 10% of its energy is sourced from renewable energy and it is investing USD 210 mn in renewable energy. EABL sends 50 percent of its waste to landfill, which scores it highly for SDG 12, Responsible Consumption. It is investing in Youth Employment, SDG 8, by spending $670,000 on unskilled youth training for the longer-term benefit of the community. EABL also scored highly on all SDGs against its brewer peer group and against other portfolio companies.

Valuation discount to historic average implies an attractive entry point

Market capitalisation to GDP ratio is a gauge of market valuation: Emerging Markets (EM) and Frontier Markets (FM) are a long way behind Developed Markets (DM) and their own 10y averages. The varying penetration of technology stocks, privatisation, multinationals, private equity clouds comparison across regions. However, the discount to historic average is undeniable and implies an attractive entry point for those with longer time frames.

The Adventis Strategy continues to have a quality bias and offers value and growth with a PE ratio of 12.3, dividend yield of 5.9%, and a ROE of 27.44%. The strategy is well positioned to take advantage of current market conditions.

Market Commentary

In April we wrote that the IMF had approved $3.4 billion of emergency funding for Nigeria after the Central Bank of Nigeria (CBN) committed to “maintaining a more unified and flexible exchange-rate regime”.  This month, in an attempt force the Nigerian Government to liberalise the NGN exchange rate, the World Bank announced that it would not release an agreed USD1.5bn loan until the various FX rates were unified and allowed to be determined by the market. Gross reserves are down 20% y-oy to $36 billion. These have been somewhat cushioned by the CBN not making FX available to the market. The official rate is USDNGN387 while the parallel rate is reported at c. USDNGN460. We expect a further currency devaluation to these levels. The strategy remains well positioned in Tier 1 Nigerian banking stocks which are long USD and provide a hedge against any currency devaluation.

In an attempt to meet OPEC production cuts, crude oil production in Nigeria dropped by 185,000 bps to 1.59 million bpd in May whilst the operating rig count was halved.  Nigeria’s Current Account (CA) deficit fell 29.8% q/q in 1Q20, equivalent to -1.3% GDP. Exports fell by 14.9% driven by lower crude oil earnings along with a steeper decline in imports (-19.8%) which lifted the 1Q20 trade balance. The IMF has downgraded Nigeria’s 2020 growth projection to -5.4% lower than the -3.4% forecast in the first Covid-19 related downgrade in March.

The Egyptian stock market returns were the strongest across Africa this month. The IMF lowered its forecast for Egypt’s FY19/20 GDP growth to 2% and FY20/21 to 2% from 2.8% previously. As most countries are expected to report negative GDP growth this year, positive GDP growth is a standout performance. The Adventis Africa Equity Strategy is overweight Egypt.

The Central Bank of Kenya (CBK) kept its base lending rate at 7% in June. Indicators for the second quarter (April-June) suggest that the impact of Covid-19 on the economy was most pronounced in April. Kenya saw evidence of an economic recovery in May supported by improved agricultural output and exports, although the services sector remains subdued. The current account deficit is expected to remain stable at 5.8% of GDP in 2020. In the banking sector, gross non-performing loans (NPLs) were 13.0% in May down from 13.1% in April. A total of 23.4% of loans of the total banking sector loan book have been restructured.

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