African Thoughts: January 10, 2012

As we welcome 2012 in, lets all hope that the coming year is more profitable for all of us. One thing is for sure – there is never a dull moment in Africa! Yesterday was obviously the first day of the fuel strike in Nigeria which threatens to cripple many industries within the oil-rich nation. Outside of this, the first week of the year was relatively quiet across most markets as many market participants (both local and foreign) were away on holiday. We expect that this later this week we will see a pick-up in market activities as participants return from their holidays. Tomorrow is also the Kenya MPC meeting, we expect them to keep rates on hold.

As the first week of the year was uneventful from a market perspective, we ran some analysis on performance on some of the stock exchanges in our universe for the year of 2011. Some comments below:

BRVM:

BRVM Comp -13.11%. Well documented in early 2011 was the election hangover which deepened into a civil war in Q1. With the market shut for a period of time, and rumours of relocating the exchange and some banks, sentiment was never positive. All sectors lost ground with the Food & Beverage sector down by 23.10%, Telecomms dropped by 13.33%, Packaging decreased by 22.98% , the Textile sector lost 14.01% and the Petroleum sector dropped by 14.51%.

Egypt:

EGX30 -50%. As expected, the North African state also took a huge hammering following the Arab spring and subsequent closure of the EGX. Europe concerns also worry the largest African bourse (ex SA). The political noise continued to rumble throughout 2011 with many clashes and many dead. By the end of the year, the first newly elected parliamentary elections took place which resulted in Islamists controlling approx 75% of the seats, which added some fears to stake holders in the country. 2 Cabinet reshuffles took place during the year after social pressure from the masses. Economically, the chaos hurt investor confidence as well as tourism. Interest rates rose by 4%, foreign reserves shrunk by 50% ($18.1bn, down from $36bn).

Ghana:

GSE -3.1%. On the back of the “oil story”, Ghana started off 2011 in a very bullish way. Half way through the year, the bourse was +18.89% as investors piled into a typically very illiquid market. Many names traded well above what we believe fundamentals dictate, and thus a natural sell off/price correction was to follow in H2. In many situations, investors were happy taking profits in some names that had rallied hard. Also, global factors can also be partly attributed to the sell-off. Ghana is still very much a firm favourite with international investors yet the illiquid nature of the market makes it difficult to participate in.

Kenya:

NSE 20 -26.9%. High inflation, rising interest rates, weakening currency……well documented. On the positive side, the shilling strengthened into year end, and company earnings remained solid among the large caps although Safcom had a disappointing 1H12. Also notable was the MPC reverting away from their tightening stance during Q4 with the CBR raised by 400bps in Oct, 550bps in Nov and 150bps in Dec. Worrying, the volumes were down hugely which is a concern for the second largest market in the SSA (ex SA) universe. Local investors particularly looked to switch out of equities and into higher yielding fixed income securities. With elections planned for 2012, much of the focus will be on the political landscape.

Malawi:

MASI +8.41%. With all the indices trading up for 2011, and with 2010 volumes and turnover higher in 2011 than 2010, we conclude that 2011 was a relatively good year for Malawi, despite it being a very small and illiquid market. Some of the top gainers were:
•  OML (+52.14% - benefitted from currency movements as well as investor appetite for a hedged investment while their JSE and LSE listings offered arbitrage opportunities. OML also pays a good dividend),
•  BHL (+9.38% - gained after refurbishments and reduced financing costs),
•  FMB (+7.69% - on back of improved technology delivery),
•  Illovo (+18.18% - strong performance as market stabilized as expectations of higher export earnings as sugar prices in East Africa increased),
•  Nico (+19.57% - strategic equity partners across a number of businesses allowed benefits to accrue to the Holding as “bottled up” value was unearthed), and PCL (+2.86%). •  Losers included NBM (-10.49%), NBS (-9.09%), and MPICO (-3.23%).

Mauritius:

Semdex -4%, Sem-7 -6.1%. After a strong start whereby the Semdex reached an all-time high of 2,113.61 on 16 May, the market started to drop and ended the year down about 4%. The Sem-7 also dropped points closing down approximately 6.1%. With the Indian Ocean Island’s close relationship with Europe, there are some commentators who are surprised that the index didn’t fall by more. Predictably, hotel stocks were the worst affected heading south by 20%, while the banking stocks held up pretty well only falling by 2.7%. Some diversification was evident with investors switching out of hotels and into banking, industrials, sugar and property. In terms of statistics, the Central Statistics Office estimated 2011 growth at 4.1%, mostly led by fin services (+5.5%) and transport, storage and communication (+5.5%) while construction is expected to have posted a negative growth of 1.8% (compared to +4.3% in 2010).

Morocco:

Casablanca -12.7%. Euro debt concerns as well as the disruption caused during the Arab spring in the early part of 2011 kept many an international investor away from North Africa. This, married to the characteristically high valuation levels meant the index was always going to be struggling. Even some “window-dressing” trading from institutional investors just before the end of December which lifted the market by a few percentage points couldn’t raise the index up enough. There were some IPOs throughout the year but generally rather small and didn’t help sentiment. A successful referendum and election will more than likely help sentiment, but Euro debt crises continue to weigh on the Casablanca exchange.

Nigeria:

NSE -16.31%. Disappointing year in Lagos, the largest of the Sub Saharan markets (ex SA). Again, the Euro debt crises ran through the market and investor sentiment towards risk. After the relatively successful and peaceful elections a number of investors held high hopes for Nigeria. Trading volumes were also down at worrying low levels which made investing even more difficult. The low liquidity and poor market sentiment meant that both foreign and local participants were wary of playing in the market. Also to note that was while the economy grew by 7.4% (forecast 7.12%), the unemployment rate increased to about 23.75%. Security concerns were also a major concern and this is again rearing its ugly head with recent clashes. The other big story which is happening as we write is the striking that is going on regarding the scrapping of fuel subsidies. Time will tell how this pans out, but it does bode for a rocky ride at the start of 2012. Interestingly, the Nigerian bond market shrunk by 70% from 2010 to 2011, this despite the MPR rising from 6.25% in 2010 to 12% in 2011. Some of the most shocking performance stories of the year were Diamond Bank -74.4%, Dangote Sugar -70.63%, Dangote Flour -70.24%, UBA -64.62%, Oando -58.33% and Skye Bank -56.36% among the companies that lost half their market cap. Consumer names did well with Nestle +45.11%, Guinness +31.19%, PZ +11.11% and Unilever +7.81% while NB +22.46% and Wapco +6.27% also closed the year in the black.

Tunisia:

-7.63%. As expected, a tough year in Tunisia, which is not surprising after all this is where the Arab spring began back in early 2011. On top of this political noise, the main drivers of the Tunisian economy were hit, Private Investments were down 19% while FDIs lost more than 1/3 for y-o-y figures, exports slowed down massively from 20% to 7% while 2 of the major sectors (Tourism and Phosphates) collapsed. Local commentators are expecting GDP growth to be flat to slightly negative for 2011. Also worth taking into account is the social cost of all this upheaval and while we believe the uprising is good for the longer term of the country and region, the short term disruption is large scale with unemployment expected to reach 18%.

Zambia:

LuSE +22%. Some of the best performance was achieved by the following: •  African Explosives – up by 121%
•  Bata – up by 150%
•  Puma Energy (BP) – up by 166%
•  Lafarge – up 10%
•  Pamodzi – up 80%
•  Standard Chartered - up 63%
•  Zanaco – up 31%.

Most of this strength was driven by strong interim results posted during the year. The Puma rally was on the back of the pending mandatory offer following the acquisition of BP Zambia.

Zimbabwe:

Ind -4%, Mining -50%. Industrial – after a strong start to the year, the index changed direction in mid-March after threats of an election and other political noise started to make headlines thus deterring investors. The decline from then on was rather consistent and despite a rally in late Dec it never recovered fully. Mining – after spending most of the year flat the Mining index got an absolute hammering in Q4. There were some sector specific issues around mining and ownership laws and well as company specific issues (Hwange – board wrangles; RioZim –debt issues) that hurt this index. Interestingly, total turnover increased by 22%, mostly due to a number of large special bargain deals that went through. Noticeable movers were Econet -16%, Pearl +52%, OKZim +32%, Delta +8%, Aico +6%.