By Rami Hajjar
SIR: Global markets started the year on a very positive note, with the S&P 500 up 9.0% at its peak in early February and the MSCI World Index up 9.4%, driven by expectations that the interest rate hiking cycle in developed markets would peak earlier than initially expected. The S&P 500 and MSCI World Index then wiped almost all these gains by early March to bounce again and end the quarter up 7.5% and 7.7%, respectively.
The main event in March was the failure of Silicon Valley Bank and two other banks in the US, and the subsequent takeover of Credit Suisse, one of the oldest and most prominent banks in Europe. This triggered fears of larger-scale contagion and a broader financial crisis. These fears later receded due to high-level intervention that guaranteed deposits in the US.
Amid this turmoil, the MSCI Emerging Frontier Markets Africa ex South Africa Index underperformed the global market, dropping 3.1% for the quarter with diverging country-level performance: Egypt (+12.5%), Ghana (+12.3%), Nigeria (+7.0%), Morocco (-3.1%) and Kenya (-11.5%). The unfortunate fact is that these are local currency performances. In US dollars, Kenya, Egypt and Ghana dropped 17.6%, 9.9% and 1.6%, respectively. The tightening global liquidity conditions and stronger US dollar are not conducive to stable currency performances in emerging markets. This negatively affects dollar returns over the short term.
Nigerian exposure generates positive returns
Our Nigerian exposure also generated positive returns during the quarter, mainly through the banks and Seplat. An important development has been the election of Bola Tinubu as president. This removes the “election overhang” in the market that dominated the second half of 2022. We are cautiously optimistic that the new administration will deliver on a number of crucial reforms: allowing market forces to drive the naira, lifting capital controls, removing the highly costly and regressive petrol subsidy, and reintroducing orthodox monetary policies. Foreign exchange liberalisation accompanied by the right reforms is highly conducive to stocks’ medium-term dollar performance.
Future prospects for investors in African equities
Looking ahead, we are very excited about the medium- to long-term prospects for African equities. The stocks we own are highly undervalued, both relative to where they traded historically and relative to comparable shares in other emerging and developed markets. We are also hopeful for some normalisation in the foreign exchange environment in our largest country exposures, Nigeria and Zimbabwe. This should contribute to the rerating of the stocks and enable investors who hold these stocks to realise value on the selling of shares at appropriate price levels.