MARKET COMMENTARY: DRAKENS CAPITAL

By Sven Richter, Fund Manager

For the month of February 2020 the Drakens Africa ex S.A. UCITS Fund’s NAV declined 7.9%, which was behind the 5.9% decline of the MSCI EFM Africa Ex-South Africa Total Return benchmark.

Fears surrounding the Covid-19 virus dented global markets in February with the MSCI World Index falling 8.6% in USD. The Africa ex-SA markets followed this trend despite avoiding the worst of the spread of the virus to date. By month end, cases of the virus had only been confirmed in Egypt, Algeria and Nigeria. But by time of writing Senegal, Morocco, Tunisia and South Africa had all confirmed cases. Whilst there originally was fear of the virus entering the continent through the strong trade ties with China, it currently appears that all the cases arrived from Italy and France. Africa is seen as vulnerable to the outbreak due to the limited healthcare capacity in the region. It does have certain advantages however, such as the knowledge gained from dealing with the Ebola outbreak in Central and West Africa. It is normal to hand sanitizer at the entrance to any office building in Lagos for example.

None of the companies in the portfolio have announced disruptions to their supply chains from the virus, though there is a broad realisation that contingencies need to be put in place for that possible eventuality. So far the biggest realised effect of the virus on these markets is the decline in the oil price (brent crude fell 13% to end the month at $50.52 per barrel). This puts pressure on Nigeria’s balance of payments and foreign currency reserves, though provides some balance of payment relief for other economies in this universe – in particular, Kenya.

In February, Kenya’s inflation ticked up to 6.4% on higher than expected food inflation. There have been fears that the large swarms of locusts in East Africa could start to effect food production and inflation in Kenya, but it turns out that the heavy rain season was the culprit here as the planting season was affected. The locusts do remain a risk, though there presence has mainly been felt in the arid north of the country, with the key agricultural areas in the South West having only reported limited cases of locusts affecting them.

All of the fund’s key markets ended lower for the month. Morocco, Egypt, Kenya and Nigeria fell 2.3%, 5.3%, 9.0% and 9.5% respectively in USD terms. Given these movements, the fund’s overweight allocation to Kenya and underweight in Morocco were a large cause of the underperformance of the fund to the benchmark. The remaining cause was a selection effect in the Egyptian allocation, as benchmark heavyweight, CIB, was significantly more resilient than the rest of the Egyptian market. CIB makes up 21% of the benchmark, and thus the fund will continue to be underweight the stock due to UCITS diversification rules.