Bellevue African Opportunities (Lux)

Our regional markets experienced a month of heightened volatility in line with global markets that remained focused on the evolution of the long end of the US yield curve. While the overall trend in our investment space remained negative, some markets such as Egypt and Morocco  surprised with their resilience, while sub-Saharan markets (excluding South Africa) continue to struggle to see through the macro-economic pressures the region is  exposed to.

Indeed, the Egyptian EGX30 index rose 11.8% in local currency, which on paper translates to an equally impressive performance in hard currency since the EGP is de facto pegged to the USD since late January when it was devalued. That performance is particularly surprising given the regional backdrop after the Hamas terror attack on Israel and the unprecedented military response of the latter in the Gaza strip. Egypt, already in the midst of an economic storm, finds itself uncomfortably exposed to this intense neighboring conflict. Local investors are the drivers of that rally as they continue to hedge their assets against inflation – which peaked at 38% year on year in September – by purchasing stocks of corporates with hard currency revenues such as fertilizer producers and real-estate and industrial companies with operations outside Egypt. This move was further fueled by an accelerating devaluation of the EGP on the black market most probably in response to the regional tensions. Interestingly, the yields on the Egypt Eurobonds widened at the onset of the conflict but recovered quickly as investors assumed the country can benefit from its position as an intermediary.

Moroccan equities closed the month up 1.3% in local currency with the Dirham stable against both the EUR and USD. The country continues to shine with its macro-economic stability, despite the devastating earthquake in September. Inflation is on a downward trend coming at 4.9% year on year last month. The central bank is most probably done hiking rates and could have the option to loosen as early as 2024. The current account deficit in Q2 was the smallest since 2007 on strong tourism and auto exports, which are the fruits of a successfully implemented industrial policy.

After three months of respite, Nigerian authorities have once again let the Naira devalue with the USD crossing the 800 Naira mark. The 3.7% devaluation is small compared to the 39% devaluation in June but it remains far from clear the exchange rate reached a market clearing level. It is unclear where such a level lies as the black market and official exchange rate seem engaged in a cat and mouse game. Inflation already at 26.7% year on year in September is bound to rise further pulling interest rates higher. Nevertheless, the equity market continues to compensate foreign investors for FX losses with the NGX up 4.3% in October. The assumption that the equity market can continue to look through the economic damage the FX adjustment dovetails is very risky.

The South African market mirrored the moves on global markets with equities posting a 3.8% local currency loss in October and the Rand gaining 1.25% and 1.2% versus the USD and EUR following a return of risk appetite during the last days of the month. In Kenya, equities lost 7% in local currency as the macro-economic challenges continue to darken the mood and the Kenyan Shilling shows nothing else than a steady decline versus the USD with another 1.5% loss against the USD in October.

The major part of the losses in the fund during the month of October came from the exposure to First Quantum Minerals, the Canadian listed copper mining company with operations in Zambia and Panama. While the company reached an agreement with the Panamanian authorities to modify the mining contract and increase royalty payments, popular protest led the government to renege on the deal and call for a referendum on it.  The case illustrates the difficulties the global economy will face to source the raw materials required to achieve a green transition. We aim to reduce and de-risk further our exposure to Egypt given the challenging economic situation, lack of reforms and the risks to the country from the Gaza war. The fund holds a substantial allocation to cash and treasuries as we review the investment opportunities landscape.