Entrepreneurship Zone: 18 May 2023 :: Allan Gray’s outlook on equities in Zimbabwe, Nigeria and Egypt

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Entrepreneurship Zone: 18 May 2023 ::  Allan Gray’s outlook on equities in
Zimbabwe, Nigeria and Egypt

 




 


·          

 

 

It has been a tumultuous first quarter of 2023, and African equities have
not been spared.

Global markets started the year on a very positive note, with the S&P 500
up 9.0% at its apex in early February and the MSCI World Index up 9.4%,
driven by expectations that the interest rate hiking cycle in developed
markets would peak earlier than initially expected. The S&P 500 and MSCI
World Index then wiped almost all these gains by early March to bounce again
and end the quarter up 7.5% and 7.7%, respectively.

The main event in March was the failure of Silicon Valley Bank and two
other banks in the US, and the subsequent takeover of Credit Suisse, one of
the oldest and most prominent banks in Europe. This triggered fears of
larger-scale contagion and a broader financial crisis. These fears later
receded due to high-level intervention that guaranteed deposits in the US.

Amid this turmoil, the MSCI Emerging Frontier Markets Africa ex South
Africa Index underperformed the global market, dropping 3.1% for the quarter
with diverging country-level performance: Egypt (+12.5%), Ghana (+12.3%),
Nigeria (+7.0%), Morocco (-3.1%) and Kenya (-11.5%). The unfortunate fact is
that these are local currency performances. In US dollars, Kenya, Egypt and
Ghana dropped 17.6%, 9.9% and 1.6%, respectively. The tightening global
liquidity conditions and stronger US dollar are not conducive to stable
currency performances in emerging markets. This negatively affects dollar
returns over the short term.


Zimbabwe sees some recovery


The Allan Gray Africa ex-SA Equity Fund is overweight Zimbabwe, which has
contributed to performance. Part of this year’s rally is related to a bounce
from last year’s highly oversold territories, but another factor at play is
renewed doubt in the ability of authorities to control inflation and
stabilise the currency. A large and sudden rally in locally listed shares is
associated with a flight-to-safety phenomenon, in most cases, rather than an
improvement of the companies’ fundamentals. While this may be the case, the
listed shares we hold on the Zimbabwe Stock Exchange (ZSE) are valued at the
lower of our conservative estimate of the stock’s fair value in US dollars
or the market price using the official exchange rate.

There are some positive developments to note on our Zimbabwean in-country
holdings. Two of our positions, Simbisa Brands and Innscor Africa, delisted
from the mainly ZWL-denominated ZSE and listed on the US$-denominated
Victoria Falls Stock Exchange (VFEX). The VFEX was recently set up in the
Victoria Falls Special Economic Zone and listed share transactions are
settled offshore. This effectively means that, subject to liquidity
availability, proceeds from the disposal of shares can be repatriated.

The remaining ZWL exposure has reduced to 18.1% of the fund and consists of
holdings in Delta, Econet and EcoCash. We hope that these shares will follow
suit and list on the VFEX. Many of the Zimbabwean companies’ fundamentals
have improved substantially since government has allowed the use of US
dollars as legal tender. Several of the companies we own are generating
revenue in US dollars, growing volumes and seeing improved real profits.
Simbisa and Innscor have paid their most recent dividends fully, and Delta
partially, in US dollars.


Nigerian exposure generates positive returns


Our Nigerian exposure also generated positive returns during the quarter,
mainly through the banks and Seplat. An important development has been the
election of Bola Tinubu as president. This removes the election overhang in
the market that dominated the second half of 2022. We are cautiously
optimistic that the new administration will deliver on a number of crucial
reforms: allowing market forces to drive the naira, lifting capital
controls, removing the highly costly and regressive petrol subsidy, and
reintroducing orthodox monetary policies. Foreign exchange liberalisation
accompanied by the right reforms is highly conducive to stocks’ medium-term
dollar performance.


Egypt faces structural problems


An investor who had exposure to Egypt in the first quarter of 2023 would
have experienced underperformance due to macroeconomic concerns. Egypt is
facing a balance of payments (BOP) crisis which has resulted in shortages of
foreign currency and a weakening Egyptian pound, which is down 19.8% for the
first quarter. This has been exacerbated by low confidence from local and
foreign investors in the government’s willingness to deliver much-needed
reforms. Factors that led to the BOP crisis include higher global wheat
prices and inflationary pressures in general, and tighter global liquidity
conditions, which are reducing the carry trade appeal of the country. But
those are cyclical factors. More crucial are the structural problems that
Egypt really needs to tackle. At the core, this requires a drastic reduction
of the state’s presence in the main sectors of the economy to provide
private sector players with a better environment in which to thrive. This
should boost the competitiveness of the country, its export base and the
sustainability of the BOP.

We recently met with the governor of the Central Bank of Egypt who
confirmed the Bank’s commitment to fighting inflation through orthodox
measures and provided some reassurance that the government is on track to
deliver certain reforms. Our main in-country holdings include Eastern
Company and CIB Egypt. We think these names provide a good hedge against
currency devaluation and have a proven ability to grow US dollar profits
over time.


Future prospects for investors in African equities


Looking ahead, we are very excited about the medium- to long-term prospects
for African equities. The stocks we own are highly undervalued, both
relative to where they traded historically and relative to comparable shares
in other emerging and developed markets. We are also hopeful for some
normalisation in the foreign exchange environment in our largest country
exposures, Nigeria and Zimbabwe. This should contribute to the rerating of
the stocks and enable investors who hold these stocks to realise value on
the selling of shares at appropriate price levels.



Lagos, Nigeria

By Rami Hajjar, portfolio manager of the Allan Gray Africa ex-SA Equity
Fund

 

- Howwemadeitinafrica

 

 


 


 


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