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Africa Market and Lombard Fund News

Monthly Report May 2017

06 Jun 2017

South Africa

As widely expected, the South African Reserve Bank kept its key rate unchanged at 7%.  The state of the economy is still very uncertain and the Reserve Bank had no choice but to be cautious ahead of further ratings decision due in the coming days and weeks.  While we agree that if inflation continues its downtrend a rate cut could be possible. However, we continue to view the current environment as uncertain.  The fund used short positions in banking and retail stocks to hedge South Africa risk during the month.  The fund also substantially reduced exposure to mines in the face of lower commodity prices and the imminent publication of the new mining bill.  It is expected that due to the significant political risk, that government may use the bill to improve popular support at the expense of investors.


According to the country’s National Bureau of Statistics, Nigeria’s recession extended in 1Q17. Its GDP contracted by -0.52% (year-on-year) in real terms, it is the fifth consecutive quarter of contraction since 1Q16. This quarter’s GDP figure is higher by 1.21% from rate recorded in the preceding quarter and well above what analysts have predicted.  Our previously stated thesis to stay long Nigeria in the face of the overwhelming negativity by investors appears to be correct. We continue to see the rising oil price as the main driver in the return to economic growth.  Further, we continue to believe that investments into defensive counters should be favoured over the high beta banks, which given limited liquidity in Nigerian equities are prone to sudden corrections.  We have also observed that the central bank has managed to narrow the spread in the naira currency’s official and parallel market rates. 


Following similar moves by the National Bank of Egypt, Commercial International Bank lifted restrictions on customers’ overseas credit card purchases but kept restrictions on foreign-currency cash drawings. This signals that the foreign-exchange issues the country has been dealing with are coming to an end. Investors are returning to the Egyptian pound for the first time since its floatation.  Egypt’s net international reserves have risen to their highest level in six years, while overseas holdings of Egyptian government debt have roughly tripled. 


The funds patience in Safaricom has started to pay off. Following Vodafone PLC’s recent announcement to sell its 35% to its South African unit; Vodacom Group Ltd, in a deal that will see M-Pesa expand to a number of African countries apart from South Africa.  Shares in Safaricom have risen by more than 32 per cent over the last two months, triggered by the promise of increased returns to shareholders on expansion of M-Pesa and the impressive full year results which outpaced analysts’ expectations. The above deal could also help Safaricom sustain its growth in the long-term as much as its current product line up.  We also observed large international fund interest in the company.

Looking forward to our next communication. 

Derek Seely

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