In the first quarter of 2020, all risk assets globally were shocked into a bear market by the actual and anticipated economic consequences of the COVID-19 pandemic, with Africa feeling the full brunt of the impact. US dollar returns in all major markets were in negative territory: Egypt (-30%), Nigeria (-25%), Morocco (-25%), and Kenya (-24%). The MSCI EFM Africa ex South Africa benchmark was down -27.7% in USD terms (-7.7% in ZAR). The Absa Africa Feeder Fund generated 2.2% positive alpha in USD terms (+4.1% in ZAR). The silver lining in 1Q20 was that the portfolio behaved like a Rand hedge during what was the second largest quarterly decline in the Rand against the US Dollar since the dawn of democracy in South Africa.
To date, the medical toll in Africa has been relatively muted due to fewer travelers into and out of African countries, a warmer climate, a younger population, delayed testing and indeed the speedy lockdowns and curfews implemented. Africa has not (perhaps yet) seen the kind of surge in COVID-19 cases that would overwhelm its significantly weak medical systems. Our main markets (Kenya, Egypt, Morocco and Nigeria) saw their first confirmed cases between 6 and 15 March while South Africa confirmed its first case on 28 February 2020. These main markets have had a weighted growth rate in cases of 15% per day (South Africa’s growth rate is 19% per day) with a plateau already being witnessed in Morocco and Kenya.
Unlike the medical toll, the economic toll of countrywide lockdowns is already apparent. Below is a discussion of some of the important themes investors should keep in mind during this period.
Growth recovery in Africa will be “V-shaped”
In its recently released World Economic Outlook, the International Monetary Fund (IMF) forecast a global recession in 2020. Our large markets will suffer a decline in growth this year, in tandem with the rest of the world. In 2021, post the COVID-19 crisis, all economies excluding Nigeria, are expected to have returned to and potentially exceeded the level of economic activity they achieved in 2019 before the pandemic. Morocco is expected to be 1% above its 2019 Gross Domestic Product (GDP) in 2021, Egypt will grow +5%, Kenya +6.1% but Nigeria and South Africa will be down 1.5% and 2%, respectively compared to their 2019 levels of income.
Debt – there will be no debt crisis in the large economies
Public sector fiscal deficits in Africa will expand in order to partially replace the decline in private sector expenditure in 2020. The impact of this will be higher debt levels across the board, at a time when questions about debt sustainability and fiscal consolidation were growing louder in the period before the crisis. The IMF has taken the lead in providing support by expanding the scale of the Rapid Credit Facilities available to Emerging Markets, with large disbursements already made to countries like Senegal, Rwanda and Ghana. Other organisations such as the African Development Bank, World Bank, Paris and London Clubs are currently debating ways in which African countries can be assisted on a short-term basis during this crisis and proposals such as six-month moratoriums on debt payments have been tabled. We expect that this will be a short (12-month) crisis and these measures will provide some much-needed relief. That said, it is important to remember that many African countries now have a large stock of commercial / non-concessional debt (such as Eurobonds) that are beyond the scope of these discussions. Nonetheless, we do not expect any credit events to arise in this period from any of our large markets.
Commodity prices – Nigeria stands alone
Kenya (oil importer), Egypt (neutral) and Morocco (oil importer) do not suffer an added blow to their economic and investment outlooks because of lower oil prices. Indeed, when their economies restart in an environment of historically cheap petrol and diesel prices, this will be a boon to disposable income. Nigeria’s recovery however will be dragged lower and will be more “Nike-swoosh” than “V-shaped” because of its over reliance on oil. Nigerian authorities may yet have a “good crisis” if they add floating the Naira this year to their excellent decision to remove petroleum subsidies. Before such a move we remain cautious and advocate remaining underweight Nigeria.
Currency risk – still a Rand diversifier
We do not expect the currencies of our large markets to devalue or depreciate against the US Dollar anywhere near as much as the South African Rand has done in the first quarter. This is due to the lower reliance on foreign portfolio investment to fund external imbalances. The risks to forex earnings lie mostly in trade, tourism and remittance and in the case of Nigeria, oil. All of these are likely to recover over the next 12 months in our view. Our concern about the Nigerian Naira convertibility (which we think should devalue to NGN 465 to the Dollar) has resulted in us reducing our Naira currency exposure to 5% of the portfolio versus 16% in the benchmark.
Positioning – up-weighting quality, with conviction
Our sector positioning has tilted more heavily towards mobile telecommunications companies, which should – despite being sold off indiscriminately – actually benefit from increased voice, data and mobile money traffic. We have also up-weighted our investment in the very best banking stocks on the continent which were priced for insolvency (steep price to book value discounts) which we believe is irrational for the very best financial institutions even in the short term. We have also up-weighted South African companies that have significant African (ex South Africa) exposure but whose valuations fell so much in the sell-off that their African businesses were valued at less than zero. Lastly, going into the second quarter of 2020 the portfolio will likely hold more cash than normal, to patiently capitalise on opportunities and provide some balance in what is still a volatile environment.
The subsequent months will be uniquely challenging for Africa and the world. However, based on the current COVID-19 case growth rates on the continent, we believe we have seen a strong enough global and local policy response. This suggests that we have reached a bottom in stock prices, and while the recovery cannot be timed, we believe it can be priced and as such, we are positioned in stocks that are overly discounting the challenges ahead. We advise investors to remain calm and view these times as attractive entry points.