Contagion from Wall Street

One of GTI’s emerging middle class advisers (a specialist Sub-Saharan African Adviser) wrote at the end of December:

Most African markets saw volumes plummet in December as local and foreign investors stuck to the sidelines. Of the more liquid markets, such as Egypt and Nigeria, foreign investors were still selling earlier on in the month to raise liquidity for year-end, but this eased during the month enabling the markets to recover by month end. That was not necessarily the case in US dollar terms though. In Nigeria, the local currency, the naira, was devalued by the Nigerian Central Bank by 17.4% during the month in the wake of falling oil prices. Generally speaking though with the exception of the two commodity based currencies, the naira and the Zambian kwacha which eased 6.5%, currencies have held up if not rallied during December.

For the year as a whole.....(our) price dropped an unpleasant 47.7%, much of which occurred in the last quarter which saw the price decline 38.4%. By comparison, over the year the MSCI World Index declined by 42.1% and the MSCI EM index by 54.5%. Africa’s “lack of correlation” with global markets eventually succumbed to the severe stress in these markets forcing investors, especially foreigners, and in the case of Nigeria, domestic margin traders, to sell. Not surprising, the better performing markets have been the small and illiquid markets and those that foreign investors have been unable to explore.

In local currency terms, the best performing market was Ghana, which rose by 58%, followed by Namibia which gained 28%. In US dollars terms however those gains were reduced to 20% and -7.5% respectively. The relatively stable kwacha enabled Malawi to win the best performing market in Africa award with a gain of 25%, followed by Tanzania and Tunisia which rose by 6% and 3% respectively.

On the flipside, the worse performing markets in Africa were Egypt, which declined by 56% (in both USD and Egyptian pounds), followed by Nigeria which fell 54% in US (46% in naira). Mauritius was next falling 50%, followed by Kenya down 47% in USD (35% in shillings). Needless to say, these are markets where foreign investors were most active.

Local investors felt less pain than their foreign counterparts in both Botswana and Zambia. In the former, the local market was down by 16% but twice that (down 33%) in USD terms. Zambia fell 28% locally but 45% in USD terms. In Zimbabwe, the market never finished the year as trading ceased in mid November whilst the brokers attempted to unravel unsettled trades. To the end of October, which we believe was the last sensible month-end, the index was down by 55% in US dollars but up by 9.6% to the power of 17 in a meaningless local currency!

That is all now history. Looking ahead, it’s hard to see why markets should continue to fall for fundamental reasons and, assuming foreign investors have now completed the bulk of their sales, markets should be rising. Indeed, local investors, both private and institutional, tend to see the year end as a cut-off date and are reluctant to trade or take positions until that time has passed. With inflation now falling and interest rates on their way down, equity dividend yields are looking attractive to local investors. Whilst economic growth will decline somewhat from the high levels of 2007 and 2008, African economies in general should continue to grow by 3-6% in 2009 supported largely by the domestic side of the economy. Our recent trip to Nigeria before Christmas clearly highlighted to us that there was little if any slowdown in domestic consumption to date noted by the companies that we saw. That is encouraging in a tough world.