MARKET COMMENTARY:  ADVENTIS SA

By Joseph Rohm, Managing Director and Portfolio Manager

Africa has done relatively well in keeping the march of the coronavirus in check. Many African governments were aware of the dangers of a pandemic having recently dealt with Ebola and therefore responded quickly to the outbreak of the coronavirus. The number of deaths recorded in Africa since the first person tested positive for the coronavirus in February remains low, at just over 4,230 — tiny set against the almost 400,000 global fatalities.

We have seen the speedy implementation of interest rate cuts, a rapid response in debt markets and a range of fiscal stimulus packages that have limited the economic impact of the coronavirus on the African continent. An overall African stimulus package already made available to assist efforts in fighting the effects of the virus stands at over $72bn, roughly 3% of Africa’s GDP. 

The IMF’s GDP growth for 2020 in Sub-Saharan Africa (SSA) is forecasted to contract by 1.3%, significantly lower than the -6.1% of advanced economies with larger service sectors whilst the SSA 2021 consensus forecast of 4.1% currently shows Africa is expected to have a strong v-shaped recovery. African economies are proving to be less volatile than developed markets and offer continued high growth.

The market sell-off in March provided a particularly attractive entry point for both African public equity and African fixed income. African markets trade on historically low valuations. Our Africa Equity Fund focuses on high quality, mostly subsidiaries of multinational companies, and trades on a price earnings ratio of 10.7, dividend yield of 7.0%, and a ROE of 30.8%. Our portfolio companies have strong balance sheets and have all reported resilient results in earnings season. Our Africa Fixed Income Fund has a gross annual yield in USD of +11.3%, which stands out in today's low interest rate world. The debt burden in developed nations is high while Debt to GDP levels are low in Africa. The Africa Income Fund has therefore not experienced and defaults since inception in March 2014.  

Africa is experiencing a great economic convergence with the developed world. The threats to developed economies and markets are increasing daily while Africa, with its youthful population being the economic future of the world, is likely to experience decades of economic growth. We see increasing tension between China and the US around trade deals and global economic positioning, which will result in ongoing developed market volatility. The US dollar looks both expensive and vulnerable as these geopolitical tensions ratchet upwards. In this context global investors are significantly underweight on Africa exposure and we see the growing relevance of African investments for both performance and diversification purposes.