Africa Equity Strategies

September 2020

Strategy Performance

Financial markets were weak during the month of September with the S&P 500 -3.9% for the month of September which followed on from the strong performance in August (+7% USD). Stock markets fell in September as investors were concerned about stalled fiscal stimulus talks in Washington, the upcoming U.S. election, and new coronavirus cases in Europe. The month did offer some bright spots that sparked brief rallies, such as an increase in merger and acquisition deals and reported progress on a Covid-19 vaccine.

Emerging markets were also weak and the MSCI EM fell -1.8% USD for the month of September.

African markets had mixed performance during September. The MSCI EFM Africa ex-SA NTR index was down -0.3% USD for the month. Nigeria +6.2% closed in positive territory whilst Egypt -2.7% was negative. Smaller Africa markets such as Uganda and Namibia closed positively.

The Adventis Africa Equity Strategy -0.06% USD was down for the month, however it outperformed it’s benchmark by 145bps over September. The strategy is up 2.2% for the quarter and 14.2% over the last six months. The strategy has outperformed its benchmark since inception (Dec 2014) by 2.8% p.a.

The top contributors to USD performance for the month were Nigerian Breweries (+32.7%), Stanbic IBTC (+13.6%) and Guaranty Trust Bank (+11.3%). The largest detractors last month were Edita (-14.0%), Societe Des Brasserie du Maroc (-9.1%) and Lucara (-11.2%).

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

We reviewed Sonatel from a sustainability perspective, given that management gave a recent operating update. Sonatel contributes toward 7 of the 17 Sustainable Development Goals. However, it ranked poorly regarding corporate governance against its peer group. We marked Sonatel down regarding the mix of experience and length of service of their board. It scores highly for SDG 8 (Unskilled Youths Trained) as it has an internal programme that is training young people for digital professions. It is currently training 300 unskilled youths, while the Sonatel Foundation also supports an Educational Centre named Ker Don Bosco. The sustainability scores are a driver of our portfolio construction. All the other telecom operators in the portfolio have higher sustainability scores, which is one of the reasons why Sonatel is the smallest telecom position in the portfolio. There is significant room for improvement, however over time we will engage with Sonatel to assist them to increasingly contribute toward sustainability.

Covid-19 and Africa

News reports and opinion articles at the start of the lockdown wrote that corruption and a lack of health-care infrastructure meant that Africa was a “time bomb” waiting to explode. To date, Africa appears to have avoided the Covid-19 nightmare scenarios accounting for only 3.4% of global infections and 2.5% of global deaths. At the end of September, the total number of confirmed active cases on the African continent continued its decline to 219,190, a 7.49% decrease month-on-month. On the other hand, infections continue to rise globally, with the UK reimplementing partial lockdown restrictions as the European continent prepares for a second wave of cases, reigniting the prospect of subdued demand and a slower growth recovery. Africa seems to have avoided the worst Covid-19 nightmare scenarios.

The African continent’s case fatality count now stands at 2.4%, with roughly 35 000 deaths among the more than 1.4 million people reported infected with Covid-19, according to Reuters. In North America, it is 2.9% and in Europe 4.5%. Hard-hit countries such as Italy and Britain have recorded fatality counts of 11.6% and 9.0% respectively, compared to 1.6% for Ethiopia, 1.9% for Nigeria and 2.4% for South Africa, the continent’s worst affected country. Hospitals in many African countries say Covid-19 admission rates are falling.

Covid-19 deaths in Africa probably are being missed and the death toll could be significantly higher, however there is wide agreement that Covid-19 fatality rates have not been as bad as predicted. Testing rates in the continent of about 1.3 billion people are among the lowest in the world, and many deaths of all types go unrecorded.

It is not clear which factors have contributed to Africa avoiding a deadly wave of coronavirus. The virus hit later than other continents, giving medical personnel time to prepare. Another reason could be that international travel is limited in many Africa countries, which could have limited the spread of the disease. The continents governments have previously also battled deadly infectious diseases such as Ebola, which killed more than 11,000 people in West Africa in 2013 – 2016. Research has also found that the risk of developing severe Covid-19 increases with age. With approximately 62% of Africa’s population under the age of 25 it is least at risk from a demographic perspective. Scientists are also testing whether the Bacille Calmette-Guerin (BCG) vaccine, widely used on the continent against tuberculosis, provides some cross-protection. For the above reasons it appears as if Africa has been able to avoid the worst Covid-19 scenarios that were predicted.

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 14.9, dividend yield of 5.0%, and a ROE of 25.3%. The strategy is well positioned to take advantage of current market conditions.

We attended a large (virtual) conference during the month and had the opportunity to meet with many of our portfolio companies. We continue to invest in well managed quality companies and used the opportunity to understand the impact that Covid-19 has had on our businesses. In general, our portfolio companies have navigated the Covid-19 crisis well and have used the opportunity to gain market share.

A good example would be our Senegalese telecom holding, Sonatel, which had muted revenue growth of 1% y-o-y. We commented on their sustainability scores earlier in the factsheet. However it has used the market slowdown as an opportunity to grow it’s customer base by 20% y-o-y, while active 4G subscribers grew by 82% y-o-y. Strong cost control led to EBITDA margin expansion to 42.1%. We believe that their mobile money offering, Orange Money, is also well positioned to be the dominant mobile financial service offering in the region. This is a company that has positioned itself well for a recovering market.

Market Commentary

Egypt’s annual headline inflation accelerated in September to 3.7%, from 3.4% in August while Egypt’s balance of trade deficit contracted 51.8% YoY to USD2.28bn in July, from USD4.73bn in Jul 2019. At the same time the IHS Markit Egypt PMI posted 50.4 in September, up from 49.4 in August, the highest rate since July 2019. This is an indicator of an expanding manufacturing sector, which aligns with the World Bank’s estimate of 6.4% GDP growth next year for Egypt. Egypt remains one of the most exciting markets in our investment universe.

Central bank of Morocco expressed satisfaction with the “resilience” of remittances from Moroccans residing abroad (MREs) despite the COVID-19 pandemic as it expects a “limited decrease of 5% to MAD 61.5 billion ($6.6 billion) in 2020. We have observed that remittance flows to African countries have been particularly resilient during the Covid-19 crisis. However the Moroccan GDP recorded a 14.9% decline in Second Quarter of 2020, HCP predicts a 8.7% decline in 3rd Quarter of 2020. Central Bank expects the economy to see an annual contraction of 6.3% for 2020. The Moroccan economy has been less resilient than expected to the Covid-19 crisis and has been the most impacted with the exception of Nigeria and South Africa. We are underweight Morocco.

IHS Markit and Stanbic Bank Kenya PMI increased to 56.3 in September from August’s 53.0, which is another indicator of improving economic conditions in Kenya. Kenya’s CPI hit an all-time low in September dropping to 4.20% compared to 4.36% in August 2020 which prompted the Central Bank of Kenya to retain the base lending rate at 7%.

In contrast Nigeria’s PMI declined to 52.5 in September from 54.6 in August, reflecting some of the pressure the Nigerian economy is under due to the fallen oil price. However, Fitch Ratings revised the outlook on Nigeria’s long-term foreign-currency Issuer Default Rating to stable from negative citing more stable oil prices and easing global conditions. President Buhari presented 2021 budget of $34 billion, up 21% from this year. Expects the fiscal deficit to remain steady at about 3.6% of projected GDP. Nigeria plans to plug the budget shortfall by borrowing as much as $11bn spread evenly between domestic and foreign lenders. Their plan is based on oil output of 1.86 million barrels a day, average crude price seen at $40 per barrel through 2021, an exchange rate of NGN379/USD, and an inflation target of 11.95%.

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