The fund retreated 6.2% in May, in line with the benchmark, MSCI EFM Africa ex South Africa Net Total Return Index which ended the month 6.1% lower. At a country level, our underweights in Morocco and Kenya were the main positive contributors relative to the benchmark, while we lost on out overweights in Nigeria and Egypt. On a sector level, the fund gained from underweights in Consumer Staples and Telecom, while we lost on underweights in Consumer Discretionary and Industrials. No major changes were made to the portfolio during May. (All changes in SEK).
The African markets performed better (MSCI EFM Africa xSA Net -6.1%) compared to other Frontier Markets (+10.3%) in May. Investors lost faith in the Argentina Peso and later the Turkish Lira set the tone for the month with increased risk aversion, contributing to the fall in Vietnam. African markets were not isolated and most major stock markets fell. Malawi was the best market in Africa rising 11.7% followed by Zimbabwe (+6.9%). The worst performers were Ghana (-12%=) and Egypt (-11.1%). Increasing oil prices at the beginning of the month led to levels that had not been seen since November 2014 when Brent Crude hit USD 80 /bbl predicated on worries of supply shortages from Iran and Venezuela before assuming that there were several other potential suppliers that would quickly make up for any shortfall. This acknowledgment led to oil prices declining to nearly USD 75/bbl. At this time, we see the falling stock markets as a good entry point into quality companies now trading at attractive valuations. We discussed this perspective in a recent post.
Car sales in Egypt (-9.1% in May) increased 25% in March compared to the same period last year. GB Auto released its results for Q1 2018 returning a profit (USD 2m) compared to a loss of USD 8.7m in Q1 2017. The main contributors were GB Finance and an improvement in the international business segment (mainly Iraq). The central bank kept rates unchanged even though inflation continues to fall (13.1% in April vs 13.3% in March). Tourism recovery remains strong with revenue increasing by 83% in the first quarter as the number of people visiting Egypt rose 37% to 2.4m.
Nigeria (-7.6%) initially received a boost from rising oil prices but fell sharply at the end of the month as buyers disappeared when oil prices started falling again coupled with increasing turmoil in other Frontier markets on currency worries. The Senate finally approved the USD 24bn budget, six months after it was presented by president Buhari. The budget should help sustain and further drive the economic recovery in Nigeria.
In Ghana (-12.7%) MTN Group announced their intention to IPO 35% of their shares worth USD 750m in MTN Ghana. The IPO will be a good indicator of investor appetite and access to capital in Ghana since the stock market normally only trades USD 100,000 per day.
Remittances to Kenya (-1.7%) increased by almost 50% to USD 430m in Q1 of 2018 vs the same period last year. Kenya’s leading telecom and mobile money operator Safaricom released a net profit growth of 15% for the financial year 2018 ending in March. Increased revenue from data and from M-Pesa were the main contributors. The fund does not have any holding in the stock (contrary to most other Africa/Frontier investors) mainly because we do not think valuations at over 20x forward earnings match the historic growth trends, the future growth prospects, or the country risk for Kenya in general with the Kenyan Shilling identified as one of the most overvalued currencies (on a REER basis – Real Effective Exchange Rate) among frontier markets. If the current currency turmoil continues, Kenya could very well be next in line with its significant double deficits in the state budget and current account in combination with its reliance on external financing.
Capital invested in a fund may either increase or decrease in value and it is not certain that you will be able to recover all of your investment. Historical return is no guarantee of future return. The Full Prospectus, KIID etc. are available on our homepage. You can also contact us to receive the documents free of charge. Please contact us if you require any further information: +46 8-5511 4570.
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