African Thoughts: June 23, 2012

Globally the picture remains gloomy, Bernanke failing to deliver anything new, China growth concerns continue to be a drag the Spain, Greece and Europe continue to look really shaky.

Zimbabwe:

Zimbabwe’s mining Index was the top performer by a long way but as we have highlighted on numerous occasions the index is really heavily exposed to only a few names. The 16% gain was attributable to a 17.5% increase in Rio and 40% in Falgold. News of a further capital raising initiative by Rio through "unbundling" of various subsidiaries drove the miner higher. Falgold is tightly held with only 10% of the stock in free float. There was no new news in the name but the counter has been marching higher since they released improved half year results in April.

Zimbabwe, the market traded higher for both the Industrial and Mining Indices with activity largely being driven by foreign participation both on the buy and sell side. It has been a common opinion that the market had bottomed up on most stocks especially the heavy caps so it is not too surprising that gains in DELTA, ECONET, Innscor and PPC drove gains in the Industrial Index. Econet and PPC were largely local buyers but Delta was driven by foreign demand. Suggestion to revise the 51% local shareholding requirement in the indigenization regulations as well as the Zimbabwe Investment Authority Act could help stimulate foreign demand. The major economic event last week was the midterm fiscal policy review which was made by the minister of finance mid-week. Expectations were high that the policy measures will be put in place to curtail the seemingly stagnating economy and the obvious limited fiscal space that has largely driven the untenably high cost of finance from local financiers. The policy report was not very interesting in itself, little to changes save to confirm the above general economic challenges and an indication that the government may consider other options other than moral suasion to get financiers to bring down interest rates with the most notable one being the plan to create a $150m lender of last resort fund by sourcing funding for the Reserve bank. With little stimulus coming from the fiscal policy it is expected that the MPC may put a cap on lending rates to see some local investors returning to the stock market though we doubt that these would be enough to drive the market higher. Excitement is however likely to build up when we enter the June results reporting period so in the short term we expect marginal market recoveries while the impending election may dampen any gains in the medium term.

Egypt:

Egypt, last week was a very quiet week for Egypt as many awaited the court ruling regarding the Constitution and parliament case, the ruling was set on Tuesday yet it was postponed to Thursday shedding a sense of uncertainty over the market. After the court ruling on Thursday in the market, local retail investors started to increase their exposure in the market aggressively after being notable net-sellers. We expect the market to trade relatively unchanged on low volume in the next month, given its the Holy month of Ramadan. Political update: Egypt court says no jurisdiction on constitutional annex; refers presidential decree to reinstate parliament and constitutional court; adjourns hearing on constituent assembly. Official says cabinet considering increasing price of bread. President Morsi says talks continue on formation of new government, warns that law will be used to stop 'defamation'. Clinton meets SCAF head Tantawi.

Morocco:

Morocco, institutional investors, who are the real market makers in Morocco, quit the market after the 30th of the previous month, following the window dressing ‘action’ they undertook through the month of June. Most notably the month of Ramadan that has just started with trading hours lasting only for 3h and a half during the holy month, we see the market losing ground in the 4 coming weeks, on low volume in all likelihood. The macro bigger picture doesn’t seem much better. Liquidity interbank level rose over the course of the year and FX reserves have suffered with the crisis in Europe, meaning that there has been less forex inflows from Moroccans living abroad.

Nigeria:

Nigeria, the key driver of the 1.6% appreciation of the market last week was the corporate results, particularly from the banks, which have been positive from earnings growth standpoint. There was an uptick during Q1:12 reporting period as most of the banks posted robust earnings growth. It is likely that the market will maintain an upward trend over the next few weeks on the back of anticipated positive results from the banks, combined with cheap valuations. Only UBA has published H:12 figures out of all the Tier I banks while only Diamond and Skye have published H1:12 numbers among the Tier II. The CBN MPC meets this week. Consensus is that the CBN will keep the MPR on hold at 12% for the fifth consecutive time as inflationary pressure appears to be mild. The June inflation rate of 12.9% (from 12.7% in May) is below market consensus of c.13.5%. More importantly, the USD/NGN exchange rate has moved only marginally by c.1% to average NGN161.70/$ since the start of Q3 vs. average rates of NGN159.43/$ and NGN159.26/$ in Q2 and Q1 respectively at the interbank market. Further, oil prices have recovered to about $108 as of today vs. below $100 around June. Thus, the possibility of renewed investor preference for fixed income instruments as a result of rates hikes, over equities is less likely. The Euro zone crisis, the likely lackluster growth in the US, and slower growth in China should sustain a relatively cautious flow of investments into the market through H2:12. Nonetheless, we think that continued reforms in Nigeria in areas such as the agriculture, banking sector, the power sector, and to some extent the oil and gas sector are potentially positive for the market over the medium to long term.

Worst

Zambia:

Zambia, the market went down by -0.7% with the majority of the trades from CEC (31%), SCZ(24%) and Zanaco (11%). The movement in the LuSE index was mainly driven by Stanchart which was down by -3.8%. However the most significant market move was Zamefa which was down nearly 20%. Zamefa turnover was up 3%, however GP margin was down from 7.56% (F10) to 6.12%(F11). FOREX losses of nearly $2m reduced bottom-line to around than of F10. The market was up almost 10% in the last week of the year, without a rational explanation, and this might be one of the reasons that the market is struggling to get much traction this year.

Mauritius:

Mauritius, the SEMDEX declined by 0.7% to close at 1,744.89. The SEM-7, which comprises the seven largest eligible shares of the Official List by market capitalization, went down by 0.5% to 335.14 points. A significant and unusual amount of Terra traded last week, around 2.7 million shares worth Rs 105m. The Euro currency is still going down against the MUR despite the recent announcement from the Bank of Mauritius that it has launched the Operation Reserves Reconstitution to build up its foreign exchange reserves and curb the increasing misalignment of the rupee with underlying economic fundamentals. This negative impact of the Euro crisis is likely to continue to affect the hotel industry adversely - the bulk of their income still being in Euros. Given the volatility and the associated lack of clarity in the near term, investors tend to avoid the hotel industry. Due to the European crisis, the number of tourist arrivals from Europe will probably go down and diversification of client base will be a key driver of performance going forward. Air Mauritius remains in a financial turmoil, and has recently decided to cancel some of its flights to certain destinations (e.g. China, Italy). The banking sector (SBM and MCB) remain strong; recently published results still show resilience.

Other

Kenya:

Kenya, CIC Insurance listed on the stock exchange during the week on Wednesday jumping 50% to KES 5.25 on the first day of trading before pulling back to close the week at KES 4.60. The insurer trades at a premium to the sector but liquidity on the counter is expected to remain tight as most of the shareholders are locked in for a considerable period. The insurer is related to the successful cooperative movement in Kenya and co-operative banks owns an associate stake. Housing Finance edged up 1% w/w after posting flat 1H12 earnings. A 40% dividend increase appeared to provide support to the mortgage financier which saw lower lending over the period due to a lower uptake of mortgages due to high interest rates. Safaricom witnessed strong foreign investor demand climbing 9.9% to touch a one year high of KES 3.90. Delayed implementation of the lower MTR rate, an expected strong 1H13 earnings and competitive advantage on M-Pesa is driving the upward momentum. Foreign investor demand is also not being met by supply since local institutions are also starting to increase their equity positions as the Central Bank starts to ease monetary policy. Kenya macro-economic outlook is starting to look positive. Domestic oil prices were by 7.9% in the monthly adjustment while Kenya Power plans to lower electricity rates by 10% before the end of the year (depending on oil price movement), which should push inflation towards mid-single digit level by end of 2012. Earnings season particularly for the banking sector is on for the coming few weeks. We think the sector will still show resilience in earnings despite a slowdown in loan growth. Most of the larger banks such as KCB, Equity Bank, Barclays and Standard Chartered have kept their costs on deposit under control which should help buttress increase net interest margin, and thus interest income growth.