Africa Equity Strategies

April 2021

Strategy Performance

April’s headlines were dominated by the surge in India’s COVID cases. A rally in the performance of commodities (CRB Commodity Index up 5.01% in April) and a USD2 trillion US infrastructure stimulus spurred on global financial markets. Commodities were driven by limited supply at a time where global demand has begun to pick up again due to economies reducing restrictions. Global markets were therefore beneficiaries of the global risk-on sentiment witnessed in April.

Strong markets continued from March with risky assets continuing to rise. Financial markets were again mixed during the month of April with the S&P 500 +5.2% which followed on from the decent performance in March (+4.2% USD). Emerging market performance was positive in April and the MSCI EM climbed +2.4% USD. The Shanghai SE Composite also up during April +1.3% USD.

African markets were positive during April. The MSCI EFM Africa ex-SA NTR index climbed +4% USD for the month. Nigeria +1.4% USD and Kenya +8.4% USD showed improved performance after recent weakness, while Egypt -0.8% USD continued to be under some pressure. We continue to believe that the weakness in Egypt is because of a pre-Ramadan sell-off. A notable performer was Ghana +15.5% USD which is benefitting from strong foreign flows.

The Adventis Africa Equity Fund +4.87% USD was up for the month and underperformed it’s benchmark by 13bps over April. The strategy has outperformed its benchmark since inception (Dec 2014) by 2.3% p.a.

Focus on ESG and Impact Investing

Our ESG methodology is a screening tool used for risk control purposes and has resulted in a number of positive outcomes for the portfolio over the years. We actively engage with portfolio companies and potential new investment ideas. For example, we actively engaged with Namibian Breweries, the largest corporate user of water in Namibia, about their use of water during a drought. The outcome was the installation of a water treatment plant and improved water practices. Most negative screening and active engagement however happen around issues of governance and board independence, where we have had many engagements. Active engagement with management on governance has led to responses and improvements at several holdings. For example, our concerns around the Chairman’s business activities and recent litigation led to the appointment of additional independent directors and improved governance at Seplat.

This month we review East African Breweries from an ESG perspective and share some of the highlights. The company scores well on governance. In particular, their board is strong with a majority of independent directors. The social impact that EABL has in East Africa is significant given their KES 1.2 bn support for smallholder sorghum farming. Working conditions are good and health and safety standards high. There is also a commitment to conserving the environment. For example, the group has planted over one million trees and is committed to reforestation. It has one of lowest carbon footprints in the portfolio of 1750 CO2e, and has managed to reduce its carbon footprint by 96%.

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). The Impact Scores are being used to drive portfolio construction as well as risk control.

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.

Our impact metrics for EABL, one each for basic needs, wellbeing, decent work, resource security, healthy ecosystems, and climate stability are available on request.

Fund Offering Value and Growth

The Adventis Fund continues to have a quality bias and offers both value and growth with a PE ratio of 14.8, PB 4.72, dividend yield of 4.6%, and a ROE of 28.7. The strategy is well positioned to take advantage of current market conditions.

Market Commentary

Egypt remains one of our preferred markets, however the stock market has been under pressure for the last two months. The International Monetary Fund (IMF) expects the Egyptian economy will continue its positive growth in the current full year 20/21, recording 2.5% growth, even though this would be slightly down from its projection in October’s World Economic Outlook (WEO) of 2.8%. The IMF has projected that the economy will rebound in full year 21/22 to 5.7%. It also expects Egypt’s average inflation rate will drop to 4.8% in the current fiscal year, compared to 5.7% in the last fiscal year. Egypt’s current account deficit (CAD) widened by 52%year-on-year to USD4.8bn in 4Q20, according to Central Bank of Egypt (CBE) due to a widening of the trade deficit, plus 7year-on-year, on a deterioration in both the oil and non-oil balances. We view the widening trade deficit as a sign of the Egyptian economy recovering post the pandemic and like the return to robust GDP growth.

We continue to like Morocco as a market; however, it is a difficult market to find stocks that meet our investment criteria. The IMF predicts that the Moroccan economy will experience a 4.5% growth in 2021 and a 3.9% growth in 2022. It predicts that the unemployment rate will reach 10.5% in the current year, down from 11.9% in 2020. Standard & Poor’s downgraded Morocco’s local and foreign currency credit rating to ‘junk,’ from BB+ to BBB. Morocco was the last investment grade debt market in Africa.

Kenya is an attractive market experiencing high GDP growth. The IMF board approved a $2.34 billion Extended Credit Facility and Extended Fund Facility to help Kenya meet its budgetary needs in the wake of Covid-19. Kenya’s treasury is under pressure from the IMF to double the value added tax (VAT) on all petroleum products in an effort to cut the budget deficit and reduce public borrowing. The IMF has asked that Kenya impose a 16% VAT on fuels from the current 8% when crude oil prices fall. We are positive on the role that the IMF is playing on the African continent in improving fiscal and monetary discipline.

Nigeria is a challenging market; however, we do find good Nigerian companies for the portfolio. The IMF has raised Nigeria’s growth forecast for 2021 to 2.5% from 1.5% earlier announced in January at its World Economic Outlook for April. The report also forecast a 16% consumer price for the country in 2021. Nigeria has lost USD2bn in the last 13 months to disruptions in crude production due to either fire outbreaks or shutting of production from leaking pipelines carrying crude oil from wells to flow stations in the Niger Delta. The loss of foreign USD revenue further delays the opening of the FX market.

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