The Fund rose 1.5% in March, better than the benchmark index MSCI EFM Africa ex South Africa Net Total Return Index, which fell 0.2%. The Fund rose 10.1% during the first quarter of the year, better than the benchmark index, which rose 9.2%.
At a country level, the overweight in Egypt (48% of the Fund) and Nigeria (34%) contributed most positively relative the benchmark. However, the Fund’s large underweight to Kenya (0% of the Fund) was again the largest negative contributor. At a sector level, overweights and stock picks within Finance and Health Care contributed most positively versus the benchmark, while the underweight in Consumer Staples and overweight in Industrials contributed most negatively. The Swedish krona weakened by 0.4% against the USD, which had a positive effect on the return converted to SEK. In March, we increased slightly in Nigerian banks and in one of our Egyptian health care companies, Integrated Diagnostics, which released a strong report showing a sales increase of 27% and a profit increase of 35% for 2018 compared to 2017. (all changes in SEK)
The African markets (MSCI EFM Africa xSA -0.2%) outperformed other Frontier markets (MSCI FMxGCC) which fell 1.3% in March. Rwanda was the best African market rising 4.1%, followed by Kenya, which rose 3.4%. The worst performer was the stock market in Zimbabwe (-17.4%) after the country officially abandoned the 1:1 relationship between bond notes and the USD, which since the introduction of autumn 2016 never applied in practice. At the end of February, most of the USD assets were repriced to the RTGS dollar (which bond notes are now called) at a ratio of 2.5:1. The price has then depreciated further to now about 3 RTGS dollars per USD. On the black market, RTGS is even weaker, around 4:1 and further depreciation is to be expected. The liquidity shortage in the country is still severe and although the measures are a step in the right direction, Zimbabwe’s economy has a tough time ahead. (The Fund has no investments in Zimbabwe). (all changes in SEK)
The Egyptian market (+ 1.9% in March) performed strongly ahead of the interest rate announcement on March 28th. Expectations were that another cut would be made after the February cut, but the central bank chose to wait, which most analysts attribute to the increase in inflation in January and February. The consensus is now that the window for further cuts is closed until the fourth quarter of this year, as inflationary pressures increase in the near term due to Ramadan in May and subsidy cuts in June / July. The stock market reacted calmly, with banks seeing increased interest.
The stock market in Nigeria (-0.5%) traded sideways after the presidential election, while economists and analysts reviewed their forecasts, which so far has not led to any major up/downgrades. However, the Nigerian central bank surprised the market at the end of the month by lowering the interest rate by 50 basis points to 13.5%. This was the first change since 2016 when the interest rate was raised to meet rising inflation. With the cut, the central bank wants to increase the demand for loans and investments, which would be positive for economic growth. However, most economists believe that the reduction must be followed by additional stimuli, such as a reduction in the banks’ reserve ratios requirements so as to free up capital for lending. Reportedly, Nigeria’s Ministry of Power, Works and Housing wants to issue a USD 10bn bond to finance infrastructure projects. The state’s budgeted expenditure in 2019 is USD 24bn, so another USD 10bn would be a significant investment. Given the low expectations, news like these should be considered positive, but to what extent remains to be seen.
The Supreme Court of Kenya (+ 3.4%) nullified the interest rate cap that was introduced in 2016. The interest rate cap has sharply slowed down new lending, hurt the country´s GDP growth and bolstered the performance of banking shares. However, there remains uncertainty about when and how the cap will be removed. Although the current structure has been annulled, it will probably be replaced by alternative regulations, as the politicians (and people) largely supports the rate cap bill despite the negative consequences it has had on the economy.
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