Monthly Highlights: November 2009

•  Markets performed well despite month-end pullback amid risk of contagion from Dubai
•  Kenya continues to perform well amid renewed interest from foreign investors
•  Francophone remains attractive, but political risk looms large
•  Botswana posted strong month and contributed handsomely to Fund performance
 

Markets performed well despite month-end pullback amid risk of contagion from Dubai

African equity markets performed well despite an exacerbated month-end pullback amid news of Dubai World’s debt restructuring and the resulting economic impact on the global financial markets. In reality, the scope of Dubai’s restructuring appears relatively small and we believe any contagion will be fairly limited insofar as Sub-Saharan Africa is concerned. Nevertheless, events in the Middle East have resulted in elevated risk premiums across the frontier markets, and those sovereigns with generally poor data quality and comparatively low levels of transparency will undoubtedly face greater scrutiny in the months ahead. Even so, global risk sentiment continues to improve as fiscal expansion and unusually loose monetary policy fuels asset price re-flation and a reversal of investment flows back into the emerging markets. In retrospect, we had been highly skeptical of the mechanisms being employed to foster a global liquidity-led rebound during the first half of 2009. Certainly, developed and emerging equity markets had much to gain from rapid expansion of the global monetary base. Yet the rate at which this excess liquidity would be transferred into the frontier markets and Africa in particular, had heretofore been a source of considerable unease. Fortunately, our concerns have been allayed by a combination of coordinated IMF support, augmented IFI assistance, increased foreign aid, and greater international debt forgiveness. To date, these four factors have proved sufficient at both restoring investor confidence and re-establishing the region’s economic growth trajectory.

Kenya continues to perform well amid renewed interest from foreign investors

In East Africa, equity market performance was led by Kenya as the NSE 20 rose +3.93% despite concerns that S&P would cut the country’s outlook from positive to stable. Given Kenya’s inability to implement many of the political reforms promised during last year’s power-sharing agreement, we cannot argue with the logic surrounding a possible downgrade. Nevertheless, the Central Bank of Kenya (CBK) remains firm in its desire to revive a USD 450 million Eurobond, and investors are currently monitoring demand for the USD 250 million second tranche of Kenya’s infrastructure bond. On the month, we saw heavy foreign buying of Kenyan equities and Safaricom in particular, following its 1.5x oversubscribed USD 65 million debt issue. We were pleasantly surprised by the CBK’s decision to ease rates by a sharper-than-expected 75bps as the nation’s agricultural and manufacturing sectors continue to weigh on economic growth. Although the construction, retail and financial sectors have performed well of late, adverse weather conditions threaten to derail any economic recovery as the agricultural sector employs more than 70% of the Kenyan population. In Mauritius, equities declined for only the second time in nine months as the SEM-7 fell by -1.85% in November. This month’s big highlight was release of the Mauritian budget as the government looks to invest nearly USD 4 billion across 950 investment projects over the next five years. Although Mauritian tourist arrivals continue to decline, we are encouraged by the renewal of tax suspensions which should help buoy the sector until World Cup flows come on line in 2010. In Uganda, inflation fell to 12% although a spike in the nation’s trade deficit has given us pause for concern. The USE ASI (Uganda) rose by a modest +0.33% while the DSEI (Tanzania) fell by - 1.05% on the month.

Francophone remains attractive, but political risk looms large

In West Africa, equity market performance was led by Francophone Africa as the BRVM Composite rose +0.74% on the month. We are encouraged by the region’s improving fiscal situation as evidenced by this month’s announcement that the central bank for the West African Economic and Monetary Union (UEMOA) will disburse approximately USD 1.6 billion to the eight-nation Francophone bloc for the purpose of retiring nearly USD 3 billion in outstanding debt. In Cote d’Ivoire, cocoa exports more than doubled as local unions cancelled the strike which drove cocoa prices to a 30-year high in October. Although the Francophone region remains attractive from a valuation perspective, we remain cautious ahead of projected political instability surrounding next year’s presidential elections. Incumbent Laurent Gbagbo remains the front runner although major challenges from multiple contenders may well result in accusations of electoral fraud with ominous economic implications. In Ghana, the GSE ASI rose +0.28% as the central bank slashed rates by 50bp amid an increasingly dovish outlook. Despite Ghana’s structural imbalances, the agriculture and mining sectors are beginning to exhibit some tentative signs of improvement while newly instituted capital requirements should lead to greater consolidation across the Ghanaian banking sector. In Nigeria, the NSE ASI declined by -1.92% as weaker-than-expected earnings continue to weigh on investor sentiment. Although provisioning for non-performing loans appears to have run its course, Nigerian banks remain encumbered by relatively tight net interest margins amid depressed money market rates and a generally inflated cost of borrowing. In short, overall deterioration of bank asset quality and tighter access to international credit have led to sub-5% 91-day NTB yields while an elevated NIBOR curve has driven up the cost of financing between lenders. Nevertheless, we anticipate a rebound in the Nigerian banking sector as the sector is presently trading at 1.1x 2009 book value with a 2010e ROE of 22% and dividend yield of 9%. In other action, the Central Bank of Nigeria (CBN) left rates unchanged at 6% amid sluggish private sector credit growth and an overall lack of sufficient liquidity. That said, the recent success of Nigeria’s sub-national debt offerings and the CBN’s decision to revive its USD 500 million Eurobond have improved market liquidity and contributed to the overall evolution of Nigeria’s secondary fixed income market.

Botswana posted strong month and contributed handsomely to Fund performance

In Southern Africa, equity market performance was led by Botswana as the Gaborone DCI rose +10.26% on back of a 50% increase in the value of Botswana Insurance Holdings (BIHL). In Zambia, the LuSE ASI declined by -1.26% as most of this month’s flows have been centred around macro-correlated stocks (i.e. Celtel, Zambeef and Zambrew). Of note, Zambia recorded its fifth consecutive monthly trade surplus as copper accounted for nearly 65% of total exports in October. Copper is presently trading at its highest level since September 2008, and assuming prices remain resilient, we should see the nation’s current account deficit narrow further in the coming months. In Malawi, the MSE DCI rose +0.05% as the nation’s currency shortage continues to weigh on overall investor sentiment. Although the government is presently weighing a number of options aimed at alleviating the FX shortfall, the real economy continues to suffer with a number of companies delaying infrastructure investment and expansion projects (e.g. Telekom Networks Malawi). Of note, the Malawi Kwacha settled at 142.5 versus a “black market quote” of 190 at month-end. In other action, the NSE Local Index (Namibia) rose +4.19% as the incumbent SWAPO party appears to have retained control of the government while the ZSE Industrial (Zimbabwe) was up +0.30% amid central bank reform and news of a new USD 8 billion investment accord with China.