Falling African equity prices and valuations over the past 30 months have laid the groundwork for better returns ahead, according to Andrew Lapping, Fund Manager at Allan Gray. 

“The Fund owns a collection of undervalued equities that should reward long-term investors with pleasing real returns in the years to come,” he said.

The $235m Allan Gray Africa ex-SA Equity Fund returned 1.50% in January and 6% over a year. 

“The Fund bought small positions in Kenyan banks, added to the position in Nigerian banks and sold Global Telecom, Safaricom and Credit Agricole Egypt,” said Lapping.

Most African equity markets had a difficult 2016, generating negative dollar returns. 

The worst performers were Egypt and Nigeria, which fell 47% and 41% respectively, while the standout performer was Morocco, returning 26%. Kenya, the other large, liquid market, fell 9%.

By November 2016, when the Egyptian authorities finally let the pound float, the fund manager had already devalued the Egyptian pound rate used to value the Fund assets, so the subsequent stock market and currency moves more-or-less offset one another.

Lapping thinks that the Egyptian pound is undervalued and may well recover somewhat, especially if the government adopts some sensible policies and cuts back on money printing. 

“We are not net buyers of Egyptian equities, as there is less value after the rally. Our preferred exposure is still Eastern Tobacco. The Egyptian opportunity currently appears to be in local currency, fixed interest and cheap holidays,” he said.

The Allan Gray Africa ex-SA Equity Fund is a buyer of Nigerian banks, as these businesses look undervalued despite substantial risks. 

“The Nigerian bank investments detracted 8.9% from returns over the past year. Nigerian consumer businesses are beginning to move into our valuation range, but we are not yet substantial buyers,” he said.

Lapping added that it would have been nice if rather than investing in Nigerian banks the Fund had the equivalent sum invested in Moroccan equities. 

“Unfortunately this was not the case. We had zero exposure to Morocco over the year and, despite lots of looking, we have not found any businesses that we think are substantially undervalued,” he said.

The Fund’s exposure to Kenyan equities is fairly modest despite the financial companies trading on depressed valuations. 

Lapping said that the Kenyan shilling is cause for concern. 

“The shilling traded in a remarkably tight range around KES101/US$ over the past 18 months, despite a rapidly increasing fiscal deficit (now 10% of GDP) and a current account deficit of 6% of GDP,” he said.

“Private sector credit expansion has slowed recently, but a pegged currency and large twin deficits do not usually end well,” he added.

On Zimbabwe, Lapping said that it is very difficult to get dollars out of Zimbabwe, so investors with cash balances are looking to buy real assets, driving up equity valuations. 

“In pricing the Fund, we have devalued the Zimbabwean securities by 20% to reflect this anomaly,” he said.