Monthly Highlights: July 2009

•  Tightening EM spreads & implications for African sovereign debt demand
•  Nigerian equities extended their losing streak amid softer than expected bank earnings
•  Mauritius continues to perform well amid rising speculation of a global economic rebound
•  Zambian equities exhibited broadbased strength
 

Tightening EM spreads & implications for African sovereign debt demand

When attempting to gauge investor sentiment and the extent to which an economic recovery is effectively priced in, sovereign spreads often serve as a useful indicator. For example, the imputed JPM EMBI Global Spread has declined nearly 55% from its October peak to ~398bp today. With nearly 80% of the compression taking place during Q2, spreads are fast approaching pre-crisis levels. Among the many reasons attributed to recent EM spread compression are: heightened central bank credibility, policy success in battling hyperinflation, and the growing maturity of local financial institutions. Within and across Africa, demand for locally-denominated debt has picked up considerably in recent months with domestic banks and public pensions taking center stage. Domestic pension plans in particular have longer-dated liabilities and thus possess a strong appetite for locally-denominated duration-heavy assets. From the standpoint of equity investors, we believe that maturing African debt markets pose a unique opportunity for domestic lenders and credible borrowers to both supply and attract alternative financing. Certainly, we have seen a flood of new issuance as dealers remain enraptured by relatively wide bid-offer spreads. While this trend is expected to continue, a comparatively diminutive number of players will likely translate into generally illiquid trading conditions whereby investors are able to command higher yields. Yet given the relative attractiveness of expected returns on invested capital (IRRs) and the largely un-leveraged status of most corporate balance sheets, African equity investors are well positioned to reap the benefits of bond market maturity.

Nigerian equities extended their losing streak amid softer than expected bank earnings

West African equities continue to under perform with the NSE ALSI (Nigeria), BRVM Composite (Francophone) and GSE ALSI (Ghana) off by -8.83%, - 5.49% and -3.63%, respectively. In Nigeria, we saw a number of banks release earnings results with Stanbic IBTC, Ecobank, First Bank, Skye, Zenith, Access and Oceanic on the tape. Certainly, conditions remain challenging as the Nigerian banking sector must contend with increased competition, slower earnings growth and deteriorating asset quality. Yet this year’s disappointing bank earnings were due in large part to the magnitude of exceptional oneoff items and increased loan-loss provisioning as the result of excess margin lending. Although NPL coverage ratios may still require modest improvement, we have grown decidedly less bearish on the Nigerian banking sector as Governor Soludo’s focus on increased transparency combined with the recent changes to bank reporting periods and audit requirements have improved the level of confidence in our earnings forecasts. Defensive sectors (i.e. brewers, consumer staples, et al) performed well on the month while the building/construction sector posted notable gains with Benue Cement and La- Farge WAPCO up +31.6% and +16.7% respectively. Shifting to Ghana, we saw another round of bank earnings hit the wires with CAL Bank, ETI, SG-SSB and SCB headlining. Societe Generale and Standard Chartered posted particularly strong results with after-tax profit up +95.9% and 93.6% respectively. Clearly, these two banks are finally reaping the benefits of aggressive retail branch expansion and a rapidly growing deposit base. In the Francophone region, agrifinance shares retraced following June’s stellar month as SOGB and SPHC declined by -25.7% and -19.7% respectively.

Mauritius continues to perform well amid rising speculation of a global economic rebound

East African equity markets contributed positively to portfolio performance as the SEM-7 (Mauritius) rose by +7.03% on the month. Banks and hotels led the way amid rising speculation of a global economic rebound. In Kenya, the NSE 20 declined by -0.97% as banks came under pressure following an uninspiring earnings release from Kenya Commercial Bank. Increased competition appears to be taking its toll on the Kenyan banks as higher deposit funding costs continue to weigh on net interest margins throughout the sector. East African Breweries (EABL) agreed to purchase a substantial equity stake in Serengeti Breweries, Tanzania’s second largest brewer. Although the move will greatly expand EABL’s East African footprint, the stock declined amid speculation of increased competition with SABMiller and termination of its existing distribution agreement with Tanzania Breweries. In other action, the Tanzania Composite Index declined -2.13% as we saw evidence of foreign buying in National Microfinance Bank (NMB). The USE ALSI (Uganda) rose +4.33% on the month as financial services provider DFCU posted a strong +17.6% gain amid thin volumes.

Zambian equities exhibited broadbased strength

Southern Africa was paced by gains in Zambia as the LuSE ASI rose another +6.54% on the month. Zanaco continued its impressive winning streak (up +23.81%) while Celtel and Zambeef contributed to portfolio performance. Of note, we are actively monitoring the Zambian government’s decision to auction off its 75% equity stake in Zamtel and will look for opportunities to participate. In Botswana, the Gaborone DCI rose +1.36% on the month as the banking sector extended its winning streak on back of strength in FNBB. In Namibia, the NSX Local (Namibia) fell -3.62% in July on relatively thin volumes. Importantly, the Russian-owned exploration firm Sintezneftgaz Namibia uncovered potential offshore gas reserves of 14 billion cubic feet in the Namib basin. Our contacts believe this to be one of many oil and gas deposits which presently reside off the Namibian coast. In other action, the Malawi ALSI came in flat while in Zimbabwe, the ZSE Mining and Industrial Indices declined by -18.07% and -3.85% respectively.