African Thoughts: July 02, 2012

Please see below for some insight into the key drivers in selected African markets from last week as well as some of the things that we think one should look out for going forward.

Egypt:

Egypt continued to experience the wild swings in the market that we have become accustomed to over the last while with last week showing a whopping +13% increase in the index. Elections results saw the MB candidate winning the first presidential elections since the revolution, which meant the dissipation of a possible showdown with Army and thus reducing the anxiety felt by the market, with the danger of civil war dissipating somewhat. The new president was also sworn in on Sunday which is another millstone that has been reached in the journey to greater stability. Going forward keep an eye on the formation of the new cabinet and the ruling on the dissolution of parliament. The market closed a further +4.97% higher today. A sense of optimism was quite evident across the board today after Morsi was sworn in and the transition of power was done peacefully.

Zimbabwe:

Zimbabwe’s industrial sector was a strong performer last week +1.2% unlike the smaller mining sector which lost -7.1%. Part of the recovery in the market is attributable to significant activity on the corporate calendar in the form of AGMs and financial results for companies whose reporting period was March 31. A number of companies gave impressive trade updates where contrary to the contraction in the economy they seem to be doing well. Foreign investors continues to show appetite for Zim stocks as an 85% growth in foreign inflows to $4.3m boosted turnover to US$11 million while a 52% growth in foreign sales at $2.2m ensured that foreigners remain net buyers. Foreign investors show appetite for stocks such as Econet, Delta, Hippo and Innscor. However the last minute gains failed to stem losses as the industrial index lost -3.5% in the second quarter having lost -6.2% in the first quarter as economic data shows weak economic performance amid indications that the growth target of 9.4% is unlikely to be achieved, due to chronic liquidity challenges, underperforming agricultural sector and slower than expected growth in the mining sector. Going forward the following drivers will be critical to the direction of the market: Interims results to June are expected to start coming out in early august; midterm budget review is expected anytime now and will give highlight on the state of the economy and it is expected that the country’s growth forecasts will be lower on the back of poor performance in from the agriculture and mining sectors. Within the agriculture space most crops (maize, tobacco, wheat and sorghum) are expected to miss earlier targets, due to reductions in land under crop, as a result of the of poor rainfalls as well a funding problems. Mining on the other hand has not been performing well because of lack of transparency and political interference that has made it difficult to truly measure the contribution of the sector to the economy. On the political front - it’s becoming highly unlikely that elections will be held this year with a most feasible date being second quarter next year. However political pronouncements are expected to have a huge impact on the already fragile performance of the ZSE. The implementation of the indigenization policy especially in the banking sector is a key factor to watch as it will most likely hurt this sensitive sector.

Malawi:

Malawi, looking forward, take note of the effect of the lift on CGT as the tax year has just began, July 1. Investors should at the same time look to the half year performance of companies and take positions with this in mind. A keen eye should be kept on the demand on most counters and see if this can in any way transform the market and/or improve liquidity.

Nigeria:

Nigeria, closed higher last week and the average value traded at $29m looks respectable but take out the massive cross in UBN and the average value traded is a paltry $8.32m. There was a fair amount in the news last week that is worth noting; CBN’s deadline for banks to recapitalize their offshore subsidiaries expired, The Petroleum Industry Bill was passed to the presidency, Jonathan sacked top management (including the GMD) of the Nigerian National Petroleum Corporation (NNPC) and Nigeria’s governors approved Sovereign Wealth Fund launch with initial $1 billion. We expect volumes to remain weak, as investors fix their eyes on the Eurozone and other macroeconomic indices i.e. Oil Prices, Federal Reserve and foreign exchange rates; to determine in which direction the equities tide will drift. The intervention promised by the finance minister may still be a flash in the pan, as no further information has been received since the announcement. It should be noted that Q2 results are due in the next 3 weeks and we expect investors to begin taking positions in anticipation of this.

Kenya:

Kenya softened marginally in USD terms but closed the week flat in local terms. KenolKobil continued to excite the market with speculative interest building ahead of the takeover price by Puma Energy being announced. Other large caps continue to see good interest with EABL, KCB, Equity Bank and Safaricom generating interest from foreign investors. Centum Investment was on a losing streak after the regulator fined the investment firm for failing to issue a profit warning on its FY12 results. Outlook for the investment firm looks good and it is trading on a discount to NAV per share of around 35%. Inflation and GDP numbers also came in at the close of the week. Inflation came in lower than consensus expectations at 10.05% while 1Q12 GDP growth came in at a disappointing but expected 3.5%. The Monetary Policy Committee is meeting up on the 5th of July. Expectation is for the benchmark rate, CBR, to be lowered from the 18% peak level held since end of 2011- in light of lower GDP growth and easing of inflation. BAT Tobacco and the rest of the banking sector are expected to kick-off the 1H12 reporting in the coming weeks. Corporate earnings are expected to be generally supportive of valuation. On the macro front, Tulllow stopped drilling the Ngamia-1 exploration well after hitting basement rock 400m ahead of target, opting to explore the basin further by taking the rig 31km to a neighboring block. Ngamia-1 well will be tested and an operational update provided in two weeks. There is also media news that Kenya is planning on sourcing Iran oil, with credit extension being a major selling point to the deal (since no discount to market price has been provided).

Mauritius:

Mauritius pursued its downward trend over the week to close lower -0.3% lower but gains in in MCB (+0.6%), Terra (+1.1%) and ENL Land (+1.3%) drove the SEM-7 index upwards by +0.2% to reach 340.12 points. Notable news includes; Ciel Investment FY 2012 accounts reported an increase in profits from Rs214m to Rs489m over the past year mainly attributable to an increase in fair value of investment properties of Rs425m, State Bank changed its financial year end from June to December, Moody’s upgraded the Mauritius government bond ratings from Baa2 to Baa1, unemployment rate to reach 8% this year compared to 7.9% in 2011.