In contrast to the significant volatility in emerging and frontier markets in the first half of 2016, the summer was very placid—both in the U.S. and in the African markets in which we are active. As I wrote in my previous update, we have become more confident in the intermediate-term growth prospects for Africa. The pall cast over Africa as a result of the commodities downturn is waning, and despite the fact that a rate hike here in the U.S. appears to be imminent, most African currencies have been relatively stable in recent months.
Economic growth in sub-Saharan Africa has lately been below its 10-year average of about 5%, and the IMF recently projected that growth would slow to just 1.4% in 2016. Investors breaking down this growth figure by country will find that, today, like never before, Africa is divided into those countries that are benefitting from the energy and minerals bust and those that are suffering. For example, Angola, a huge oil exporter, will not grow at all this year. Nigeria, which has Africa’s largest economy, is in recession. Its West African neighbor Côte d’Ivoire, however, is set to grow 8% this year. In East Africa, Kenya, a clear beneficiary of lower commodity prices, is rumbling right along. It reported 2Q16 GDP growth of 6.2% and will likely post full-year growth in excess of 6%.
The two countries to which our Africa investments have the greatest exposure are Kenya and South Africa. Kenya, from a growth perspective, is doing quite well. Tourism is rebounding, energy is cheap and rainfall has been good lately, helping the large agricultural component of its economy. South Africa has been having a much tougher time, with significant headwinds in its mining sector and a very sour political situation in which large swaths of society have lost faith in President Zuma. However, South Africa is a large economy with listed companies in a wide variety of sectors. We are not invested in any mining companies and instead have focused on particular industries and companies that we expect can generate strong growth even in today’s uninspiring economic and political situation.
Despite the fact that we have been putting money to work at a healthy rate over the last three months, we will be looking to continue to invest opportunistically in the final months of 2016. While our investments are concentrated in Kenya and South Africa at the moment, we always look to invest in companies that are expanding profitably to other countries in Africa. We are currently evaluating opportunities in West Africa and are looking to expand our investments into that region.
We increased our positions in the following five equities during the quarter: KenolKobil (Kenya), Centum (Kenya), Adapt IT (South Africa), Mix Telematics (South Africa) and Calgro M3 Holdings (South Africa).
We made four new investments during the quarter. In Tanzania, we participated in the initial public offering (IPO) of the Dar-es-Salaam Stock Exchange (DSE). In South Africa, we initiated positions in Curro Holdings (COH), ADV Tech (ADH) and Vukile Property Fund (VKE).
The Dar-es-Salaam Stock Exchange (DSE) was incorporated in 1996 and currently lists seventeen domestic equities. Although we did not receive our full requested allocation of DSE shares at the IPO, the stock has done very well nevertheless and contributed nicely to performance. We believe that Tanzania’s government is working hard to improve investor confidence and capital flows into Tanzania, and it is encouraging local firms to list their shares on the DSE. We think the DSE is in a good position to grow as Tanzania’s capital markets expand in the coming years.
Curro Holdings (COH) and ADV Tech (ADH) are the two dominant companies in the for-profit education industry in South Africa. Both have a strong track record of growth and we see significant further expansion ahead. Education is highly prized in Africa and these two companies have stepped into this very large market with high-quality and reasonably priced education programs.
Vukile Property Fund (VKE) owns 104 shopping centers, office buildings and industrial parks across South Africa and in Namibia. In 2013, it was the first company accorded status as a real estate investment trust by the JSE (Johannesburg Stock Exchange). The company has a long history of increasing its annual distributions and now sports a yield of over 8%.
What Helped in the Quarter
Our new position in Adapt IT, the rapidly expanding technology consulting firm based in Durban, South Africa, helped the Fund’s performance in the quarter. Adapt IT is executing well, staying very profitable as it grows organically while making bolt-on acquisitions.
Our two holdings in the Kenyan banking sector, Kenya Commercial Bank and I&M Holdings, along with the rest of the bank stocks, suffered in August when the Kenyan government imposed interest rate caps and floors on the banking sector. This was widely seen as a populist move by President Kenyatta ahead of elections next summer. We are waiting to see how the banks’ businesses change over the next six months or so before committing any significant new money to them at today’s lower prices.
Going into the last few months of 2016 we expect no large changes in either commodity prices or the ambivalent investment sentiment toward Africa. For our companies, it’s mostly a period of blocking and tackling. For us, it is a time to continue to put money to work in well-managed companies trading at attractive prices.
Please do not hesitate to call or email me to discuss investing in Africa. My email address is email@example.com and my phone number is +1.619.435.1701.
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Africa Capital Group LLC
1330 Orange Avenue, Suite 302
Coronado, CA 92118