Dear Investors

In our comment last month, we noted that we had three major hurdles to cross.  

The first was the potential downgrade to Africa’s largest economy.  Which, as we predicted resulted in all the ratings agencies keeping their current outlook unchanged.  The next time these ratings agencies will take a decision will be in December.  We will continue to monitor the economic and political environment on the ground especially in the wake of the upcoming local elections in August.  The race in most major areas has become tightly contested.  We remain with the mantra that these elections have the ability to positively surprise investors, with most negative outcomes already discounted into stocks.   We will discuss possible outcomes in more depth next month’s report.

The second hurdle was the Fed’s interest rate outlook and decision.  Any rise in rates or rate expectations would have a negative outcome for African equities as investors look to higher risk adjusted returns from there investments.   Again we were able to accurately predict that no change was expected and that the Fed will remain accommodating longer than most forecasters have been arguing.

The third hurdle, was not as simple as we had expected.  Contrary to the majority of investors views, the UK voted to leave the EU.  The market reaction was instant, with global equity markets sacrificing $2.8tn - the equivalent value to the annual UK GDP.  As is often experienced when investors are taken off guard, the initial reaction is panic.  While many unknowns still exist, we know that it is going to take at least two years for the exit to happen.  Further, investors forgot that global central banks have, since 2008 being ever willing to assist in any crisis. We believe that the BOE will respond to any weakness to the UK economy, thereby reducing the risk being priced into markets substantially.    Grounded as always by facts and not emotions, the fund took the opportunity to begin looking for good quality companies that had been “thrown out” by panicking investors.

In this uncertain environment, we continue to see South Africa to be a relatively low-risk investment destination for investors looking for a foothold into Africa.  Although there was a short term sell off in the currency, as investors feared that trade ties between South Africa and the UK would be hurt, most of the initial response has been recovered.  Unfortunately, Brexit came at the wrong moment for Nigeria.  Just as the government had removed strict currency controls and liberalised oil prices, global volatility soared.  The UK was the largest source of foreign investment in Nigeria in 2015 and with most investors taking the assumption that a slowdown in the UK would exaggerate a slow-down in Nigeria, market volatility was impossible to navigate.  This extreme currency market and asset price volatility in Nigeria kept the fund on the side line, however we expect that as markets settle down, we will be able to begin investments into the region.  We note a very similar trade relationships and response from investors for Kenya as well.  We are currently investigating a number of potential investments across the continent and will prudently deploy capital as opportunities and value arise.

As we enter a new month, we suggest that although it is early days for the investment community to fully understand the outcome of Brexit, the exit from the EU may offer the UK an opportunity to engage more actively with its commonwealth partners, many of which are in Africa, providing these countries with additional key leverage.  To benefit from these improved relationships, investors will need to weather a period of uncertainty, but as African investors, we are well aware of this by now.

Looking forward to our next communication

 

Derek Seely