Monthly Highlights: April 2014

•  We have attempted to assess the extent to which a potential capital flight could exacerbate negative performance in Africa
•  West African equities rose as weakness in Ghana and the Francophone region was more than offset by strength in Nigeri
•  East African equities exhibited mixed performance as strength in Tanzania and Mauritius was offset by weakness in Kenya
•  Southern African equities mixed as strength in Malawi and Zambia was offset by weakness in Botswana and Zimbabwe
 

We have attempted to assess the extent to which a potential capital flight could exacerbate negative performance in Africa

We have attempted to assess the extent to which a potential capital flight could exacerbate negative performance in Africa. In the aftermath of the global financial crisis, private capital surged into global emerging markets (EM) and flows have been volatile ever since. It should be noted that the African capital markets were one of the last recipients of EM capital inflows and this helps explain the region's relative outperformance in 2012 – 13. There are three primary factors driving net capital inflows into the African capital markets: (i) the growth differential between the African capital markets and other regions, (ii) the interest rate differential between the African capital markets and other regions, and (iii) the overall level of global risk sentiment. Despite exogenous shocks such as the May/June 2013 taper-related sell-off in EM, the African capital markets have remained remarkably resilient as the mechanisms which amplified previous downturns (i.e. fixed exchange rate regimes, high levels of foreign-denominated debt, insufficient FX reserves, etc) are no longer as prevalent. As a result, interest rate-driven capital outflows alone are unlikely to trigger major economic weakness in Africa. Rather, capital flows into and out of the region are more than likely to be determined by Africa's ability to build and sustain growth. Looking ahead, we believe Africa ex-South Africa is uniquely positioned to sustain high levels of growth as underlying productivity levels continue to rise at a time when most emerging market regions (e.g. BRIC, Emerging Asia, GCC, et al.) are suffering from declining productivity amid weaker global demand and slower export-driven growth.

West African equities rose as weakness in Ghana and the Francophone region was more than offset by strength in Nigeria

West African equities rose as weakness in Ghana and the Francophone region was more than offset by strength in Nigeria. In Nigeria, reporting season is in full swing as we digested a plethora of 1Q14 results. In financials, Stanbic IBTC reported strong 1Q14 performance (GE: 13.7% y/y; PAT 96.3% y/y) as net interest income rose by +41.9% amid lower funding costs and a higher return on assets. Performance was also boosted an improvement in operational efficiency which saw the bank’s cost-to-income ratio decline to 59% in 1Q14 (from 67% in 1Q13). By contrast, Skye Bank posted weak 1Q14 results (GE: -1.0% y/y; PAT +25.4% y/y) as the bank’s +18.1% y/y rise in operating profits was offset by a +737.7% increase in loan loss provisions. FBNH also posted weak 1Q14 results (GE: +3.7% y/y; PAT: -12.4% y/y) as a rise in operating expenses drove the bank’s cost-to-income ratio to 65.7% (from 58.1% in 1Q13) amid a -25.9% decline in net fee & commission income. Shifting to the consumer sector, Nestle reported weak 1Q14 results (T/O: +8.9% y/y; PAT +0.2% y/y) as higher marketing and distribution costs offset +6.4% y/y growth in sales volumes. PZ Cussons reported mixed results as profits rose despite a decline in revenue (T/O: -2.0% y/y; PAT +11.9% y/y) as unrest in Northern Nigeria continues to disrupt operations. It should however be noted that improved operational efficiencies saw gross profit margin expand by 218bps to 27.2%. Unilever reported disappointing 1Q14 numbers (T/O: -2.8% y/y; PAT -40.6% y/y) as the company’s top-line continues to be challenged by increased competition across the company’s various segments. Guinness Nigeria also reported weak results (T/O: -7.1% y/y; PAT -22.1% y/y) as the company’s lager segment continues to come under pressure as consumers downgrade to cheaper value-oriented products. Transcorp reported impressive 1Q14 results (T/O: +152.2% y/y; PAT +278.3% y/y) as the company continues to boost its power generation output. Looking ahead, management expects output from its Ughelli plant to reach 700MW by the end of the year. The company is also expected to start drilling in OPL 281 after signing a production sharing agreement with the Nigerian state oil company. We are encouraged by the pace of development as Transcorp expects OPL 281 to produce enough gas for the company’s Ughelli plant to expand output to over 3,000MW in the near future. Shifting to the Francophone region, SGBCI delivered weaker-than-expected results (GE: -1.0% y/y, PAT: -44.1% y/y) as a -10.1% y/y decline in net interest income and +57.8% y/y rise in loan losses contributed to the poor performance.

East African equities exhibited mixed performance as strength in Tanzania and Mauritius was offset by weakness in Kenya

East African equities exhibited mixed performance as strength in Tanzania and Mauritius was offset by weakness in Kenya. In Kenya, we digested strong 1Q14 results from Equity Bank (GE: +10.8% y/y, PAT: +20.8% y/y) amid +23.9% y/y growth in non-interest income and a -53.6% y/y decline in loan loss provisions. KCB also delivered solid 1Q14 results (GE: +13.5% y/y, PAT: +28.7% y/y) as gains in both interest income (+11.0% y/y) and non-interest income (+19.5%) fueled performance. Shifting to Tanzania, the government has been working with Fitch and Moody's to secure its credit ratings ahead of the nation’s debut US$1 billion Eurobond. We expect the nation’s sovereign ratings to be released over the next three months with issuance at year-end. In Mauritius, the central bank plans to move to formal inflation targeting and has announced measures aimed at mopping up excess liquidity, including an increase in the cash reserve ratio. Mauritius Commercial Bank announced its FY14 economic forecasts with GDP growing by +3.6%, unemployment rising to 8.1% and inflation accelerating to 4.0% by year-end.

Southern African equities were also mixed as strength in Malawi and Zambia was offset by weakness in Botswana and Zimbabwe

Southern African equities were also mixed as strength in Malawi and Zambia was offset by weakness in Botswana and Zimbabwe. In Botswana, shares of BancABC rose by over +60% as trading resumed following last month’s announcement that Atlas Mara is acquiring a majority interest the company for up to US$265 million in cash and equity. In Zimbabwe, Econet announced that its mobile money transactions (EcoCash) have totaled US$4.2 billion since being launched two years ago. EcoCash has redefined the financial landscape in Zimbabwe by providing core banking services to individuals who had previously been excluded from the financial system. Looking ahead, management is hoping to expand the EcoCash service beyond Zimbabwe’s boarders. In other action, Delta announced that beverage volumes will remain flat on a y/y basis when the company reports earnings in May. Management noted that strong volume growth was recorded in sorghum beer and alternative beverages whilst lager beer and sparkling beverages declined on back of softening consumer demand. Further, management believes that improved efficiencies, supply chain savings and reduced maintenance costs will improve the company’s profit margins going forward.