Dear Investors

To hike or not to hike that is the question... The growing split between the Federal Reserve board of governors and regional central bank presidents on how quickly to raise rates have left investors nervous of future interest rate movements.  As the market watches every word of Federal Reserve officials for guidance on the rate outlook, we note that investors have already tightened their expectation for a policy adjustment with USD 3- and 12-month LIBOR rates are now at 2009 highs. This fear reduced central bank intervention has been built on by the ECB’s decision against further stimulus.  Investors have adopted a cautious approach to Africa leading to increased volatility, which we hope will continue to create opportunities for future investments.

Further direction from the Bank of Japan was received, as it announced it would now target the shape of the yield curve. Similar policies used in the United States in the 1960’s led to de-stabilisation of the developed economies and resulted in a substantial increase in inflation. The potential of the adoption of this policy strategy by other major central banks supports our bullish medium-term real asset and emerging market macro view. 

South Africa

 The JSE has largely failed to benefit from any of the EM rallies through the month as ZAR volatility played a pivotal role in the reduced investor appetite.  On the macro economic front, data showed the South African economy grew more than expected in the second quarter at 3.3% in the second quarter while consensus was for a 2.6% growth enabling South Africa to avoid a recession after a 1.2% contraction in the previous three months. On top of that, the country recorded a trade surplus of 33.3 bn rand thanks to the value of exports growing faster than imports.

A recent survey showed that rain prospects have improved crop conditions and yields which should boost wheat production estimate by 1.2%.   For the first time this year, inflation reached 5.9% in August falling below the upper end of the target.  As expected, the SARB left the interest rate unchanged at 7% for its third consecutive meeting. In the meantime, GDP is now expected to grow by 0.4% from 0% and inflation is now expected to average 6.4% this year just above the upper end of the 3-6% inflation target band. The general consensus seems now to believe that the hiking cycle is done and that the rates will remain unchanged until the end of 2017.

Nigeria:

Nigeria is still struggling to gain macro-economic traction.  We continue to look towards the following for confidence in a recovery 1) the Nigerian governments progress in bringing militancy in the Niger Delta to an end and 2) a successful offshore borrowing plan to be communicated and executed. This could swiftly turn the dollar flow environment into a naira supportive one. The naira has been devalued in line with other oil exporting peers and by many measures the NGN looks fairly valued against USD, having shed more than 50% against the USD since the start of 2016.

Tanzania:

Just an interesting tit-bit….Tanzania's Capital Markets and Securities Authority (CMSA) has won the "Most Innovative Capital Markets Regulator in Africa" award for the year 2016.

Kenya:

Kenyan macro risks are now manifesting just as the US business cycle has turned lower. These risks continue to unnerve investors following the decision to set a legal minimum and maximum interest rates at a rate that is below the market clearing level, leading to shortages in the formal market.  The policy designed to increase support for the government into next year’s elections is proving to be a liability. The Central Bank of Kenya reduced it interest rate by 50 basis points to 10% in an attempt to support private sector credit. This represents its second cut in four months.    Further, after avoiding the shockwaves that the Chinese slowdown wrought on the industrial commodity exporting world, Kenya is now vulnerable to a sharp slowdown of US goods producing sectors.  

These factors have now reduced the GDP growth consensus from 6% to 4% next year, as concern over a hard landing increases.

Investment thesis:

 Although we have experienced substantial increases in volatility throughout the region this month, the Africa growth story remains intact.  These times remind us that returns are not linear and patience is always rewarded.  The fund retains a defensive stance, while we continue to observe developments and look for an opportunistic entry point to add to our portfolio of investments.

Looking forward to our next communication

 

Derek Seely