By Laurium Capital

The second quarter of the year was tough for equity markets. The African markets were not immune to the global sell-off, with the MSCI Africa ex-SA Index declining by 11.2%  and the S&P All Africa ex SA Capped Index ending down 14.3% for the quarter, in what was a relatively broad-based sell-off. African markets are now down 20% for the year. The pull-back, albeit frustrating, offers exceptional value in many African listed companies.

The Laurium Limpopo African Equity Fund returned -13.1% gross over the period and is down 20.6% gross for the year. Market movements have been all about the macro fears and continued frontier and EM outflows, and whilst we believe global headwinds will persist in the short term, we don’t expect them to continue into the medium term. That said, the valuations we are seeing in Africa are at multi-decade lows and present a remarkable buying opportunity.

US Dollar strength has also continued to put pressure on emerging and frontier markets. The Russia/Ukraine situation had a significant negative impact on Egypt, our largest country portfolio weighting. Egypt is an oil importer, over 40% of her tourists come from Russia and the Ukraine and is the largest wheat importer in the world. In the face of spiking fuel and food prices our Egyptian holdings traded weak throughout the quarter, but the ongoing Russia/Ukraine situation really exacerbated the situation leading to a 15% devaluation of the Egypt pound in late March. We believe that the Egyptian pound may depreciate a further 10-15% from here, and Kenya will also have to depreciate by about 10% within the next 6 months.

Unfortunately, while Nigeria also needs to follow suit and weaken the Naira, this seems to be off the table while Buhari remains in office. There will be no wholesale devaluation under the current administration, and we will have to wait until a new government is in place in mid-2023. What we could see is potentially a creep up to NGN440-450 level where we are currently getting money out of the country. We remain hedged in Nigeria and invested in Nigerian Tier 1 banks which also provide a hedge given the significant long USD positions on their balance sheets.

While our markets have always been somewhat neglected by mainstream investors, it seems like the interest level is at a low point despite very attractive valuations and earnings growth. We don’t know what the catalyst will be in the short term but many of our portfolio companies are just too cheap to not be buying.