By Rami Hajjar, Portfolio Manager, Allan Gray

It has been a tumultuous first quarter. Global markets started the year on a very positive note, with the S&P 500 up 9.0% at its peak in early February and the MSCI World Index up 9.4%, driven by expectations that the interest rate hiking cycle in developed markets would peak earlier than initially expected. The S&P 500 and MSCI World Index then wiped almost all these gains by early March to bounce again and end the quarter up 7.5% and 7.7%, respectively. The main event in March was the failure of Silicon Valley Bank and two other banks in the US, and the subsequent takeover of Credit Suisse, one of the oldest and most prominent banks in Europe. This triggered fears of larger-scale contagion and a broader financial crisis. These fears later receded due to high-level intervention that guaranteed deposits in the US. Amid this turmoil, the MSCI Emerging Frontier Markets Africa ex South Africa Index underperformed the global market, dropping 3.1% for the quarter with diverging country-level performance: Egypt (+12.5%), Ghana (+12.3%), Nigeria (+7.0%), Morocco (-3.1%) and Kenya (-11.5%). The unfortunate fact is that these are local currency performances. In US dollars, Kenya, Egypt and Ghana dropped 17.6%, 9.9% and 1.6%, respectively. The tightening global liquidity conditions and stronger US dollar are not conducive to stable currency performances in emerging markets. This negatively affects dollar returns over the short term. For the quarter, the Fund returned 9.0% versus the benchmark which returned 4.0%.

Our overweight position in Zimbabwe has positively contributed to performance. Part of this year’s rally is related to a bounce from last year’s highly oversold territories, but another factor at play is renewed doubt in the ability of authorities to control inflation and stabilise the currency. A large and sudden rally in locally listed shares is associated with a flight-to-safety phenomenon, in most cases, rather than an improvement of the companies’ fundamentals. While this may be the case, the listed shares we hold on the Zimbabwean Stock Exchange (ZSE) are valued at the lower of our conservative estimate of the stock’s fair value in US dollars or the market price using the official exchange rate. Our Nigerian exposure also generated positive returns during the quarter, mainly through the banks and Seplat. The major detractor from the Fund’s performance this quarter was its Egyptian exposure. This was largely macro driven. Egypt is facing a balance of payments (BOP) crisis which has resulted in shortages of foreign currency and a weakening Egyptian pound, which is down 19.8% for the quarter.