Investment Adviser:

Sanlam Investment Management

(January 2014)

The US Federal Reserve looks as if it is going to start pulling back on its monetary stimulus soon. What effect is this likely to have on African markets?


We expect that the tapering is likely to be started early this year and the emerging and frontier markets that had earlier benefited from the “spill over” effect of this additional liquidity in the world’s largest market will definitely be affected. We do not expect the effect to be a game changer as global funds will look for ‘greater/better returns’ of which there are more opportunities in emerging and frontier markets. Of course, the rate of ‘foreign fund’ inflows will reduce and ultimately the rate of growth of these markets may moderate going forward.


Related to this, African markets have often attracted investors because of their relative lack of correlation to global markets. Is this still the case or is correlation growing significantly?


Although the correlation has been growing in the last few years it remains low and is in no way a one to one correlation.


Late last year the Single Customs Territory for the East Africa region was launched. Could you tell us a bit about this and why this is an important development for investors?


The East African Community (EAC) is a treaty-based regional body spearheading the East African economic, social and political integration agenda. The treaty for the establishment of the EAC was signed in November 1999 and entered into force in July 2000. The treaty set out a bold vision for the eventual unification of the Partner States. The Customs Union (CU) was slated to be the entry point of the EAC of integration. Kenya, Uganda, Rwanda and South Sudan are members of the Single Customs Territory. In order for a common market among member states/partners to grow and flourish, an effective, flawless and seamless customs union is a pre-requisite. This is an important development for investors as the following benefits accrue: Free circulation of goods within the Customs Union - elimination of non-tariff barriers; Revenue collection and management systems between states to be standardized; Reduction of internal customs border controls - single/simpler mechanism; Treatment of domestic taxes on goods traded across partner states  - VAT, excise duties etc. to be rationalized; Links between states to avoid multiple taxation, legal, institutional and administrative arrangements to reduce time and effort of transfer between states.

The political situation in Egypt remains unclear and this has affected the local market for much of 2013. How cautious a strategy do you have at the moment on Egypt?


The situation in Egypt is still unclear and developing. As such, we are continuously monitoring the situation and events on the ground. We will continue to keep the Egypt situation under close scrutiny and pro-actively take steps to alter our holdings to minimize adverse effects on our portfolio.


Are there any sectors in Egypt which are doing well despite the problems caused by the political situation?


There are some sectors like Financials and Consumer Staples which have outperformed the broader index. Even within these sectors, certain stocks have done relatively better despite the deteriorating political situation.


The outlook for the Egyptian economy is also not good. Are you pessimistic on its economic prospects, notwithstanding any specific bright spots in individual sectors or companies?


While we are not completely pessimistic about the situation, we are regularly on the look out to identify outliers in both sectors and stocks. We also have regular internal Investment Committee sessions to weigh the risk-reward situation.


The Fund’s largest exposure by far and away is in Nigeria. Can you see that situation changing at any time in the short or medium-term and what is your thinking behind investing so much of the portfolio in one country?


As we consider newer markets and stocks from other markets within the African region, we expect exposure to Nigeria will automatically reduce, in absolute terms. That said, the Fund has so far benefited from the steady growth of the Nigerian stocks in its portfolio.


The Fund also has a very large exposure in a single sector – financials. Again, what is your thinking behind investing so much in just one sector? Is it simply that financials offer far and away the best returns or are there other reasons behind such a strategy?


The investible universe (all markets in the Africa region) is overweight financials as a majority of the top 10-15 stocks in each individual country’s index are financial stocks. Additionally, the analysis and comparison of financial stocks across markets is easier than that of manufacturing or non-financial stocks. Also, financial stocks/banks have stricter regulations and governance from local regulators and central bankers. As we continue to access other markets and stocks and gain more on-the-ground knowledge we plan to diversify to other sectors. This diversification will automatically reduce the weight of financials, but their comparative overweight status will continue in the medium-term.


Outside its main four focus investment markets, the Fund also has some smaller holdings in some other African frontier markets. Do you foresee raising these exposures significantly at any time in the short or medium-term and if so, in which markets in particular?


Yes, we do foresee venturing into other frontier African markets in the near future and increasing exposure to our other smaller markets. Some of these “other” African markets have been performing considerably well (see chart below) and we envision participating in the upward growth trajectory of these markets.The markets/countries where we would look to increase our exposure, in the medium-term, are Zimbabwe, Ghana, Botswana and Tanzania.



What do you see as the prospects over the next few months for the economies and markets in which the Fund invests?


We are confident about the growth prospects for both the economies in the region and the markets where the Fund invests. Frontier African markets are some of the highest growth markets in the world and we are optimally poised to benefit from this growth utilizing out local, on-the-ground expertise.


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