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Africa Market and Lombard Fund News

Managers Report August 2016

31 Aug 2016

Dear Investors

Last month ended with traders forcing global government bonds to their lowest level in more than three years.  Investors remain concerned over extra stimulus announced by the Bank of Japan, second quarter US GDP figures expanding at a slower pace than forecast and the RBA and BoE cutting rates to a record low.  Further fear was prompted by a warning from Bill Gross that the record low yields on government debt are not worth the risk especially as Mr. Trumps goal of rebuilding infrastructure will cost in excess of $500bn.

The market continues to expect the Fed to maintain rates on hold for the rest of this year, which as previously suggested bodes well for African market currencies and other African risk assets. The prospect of further stimulus measures in Europe and Asia continues to fuel the global search for yield.

On the South African domestic front, The South African Reserve Bank (SARB), which has raised its rate by 200 basis points since January 2014, including 75 points this year, suggested that a weak domestic economy, along with an improvement in the rand's exchange rate and a marginal improvement in inflation, had provided it with room to delay a further tightening of policy "for now."  Unfortunately, the rand has since come under further pressure due to political instability around the potential of criminal charges to be laid against the finance minister.  The outlook is for the region is currently clouded by this uncertainty and we continue to maintain a defensive view of the South African equity market. 

On the Africa front, relative stability in east and west Africa allowed us an opportunity to add to the Africa portfolio.  


The reforms implemented by the Nigerian president has started to show +ve economic changes.  He has effectively reduced and punished corruption and is maintaining fiscal discipline.  Although the Niga Delta is still an issue, it appears small in comparison to economic potential. The free floating of the nira has led to the Nira/USD market unfreezing although there is still a net outflow of USD, USD can be accessed for trade and investment.  Current exchange levels appear stable.  The majority of $ earnings are still oil related and currency is vulnerable to a sudden drop in global oil price.


Tanzania is one of the few African economies that is not only strong, but growing strongly.  GDP growth is around 7% and with a population growth of only 3% this translates into strong improvements in living standards.  The stock market has sold off recently due to a change in pension fund regulations, creating an opportunity for investment.


To our surprise, Kenyan President Uhuru Kenyatta signed into law a bill which seeks to cap interest rates charged by commercial banks on loans and deposits. The move to cap the interest rates is the third time that the National Assembly has attempted to reduce interest rates to ‘affordable’ levels. In the previous two instances, dialogue with the banks prevailed.  Unfortunately, banks will now be forced to refuse loans to risky borrowers, effectively limiting future economic growth.

In line with the level of uncertainty in the African markets, we have adopted a defensive stance with investments into brewers and telco’s and excluded high beta banking investments. 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


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