Donald Trump was declared the next president of the United States (US) on Wednesday, November 9. The election outcome caught markets by surprise, and the global economy is now facing significant uncertainty only months after another surprise decision by the UK to exit the European Union. The consequences of a Trump presidency for Africa remain uncertain. Some broad Trump policy ideologies that have emerged include trade protectionism, fiscal austerity and anti-immigration, amongst others. That said, questions remain as to how aggressive these policies will be pursued – Mr Trump’s stately victory speech was somewhat surprising and a sign that he will adopt a more measured approach as president.
Regardless of who wins the US presidential election, EM looks poised for continued outperformance due to improving absolute and relative fundamentals, higher yields and sound technicals. The short-term market dynamics may be different depending on who becomes the next US president, but we expect the winner to be inevitably and severely constrained both politically and economically.
Africa, to some the dark continent filled with countless risks, to others a land of beauty and incredible opportunity. Is Africa indeed rising or is and will it remain in a quagmire of constraints?
Frontier markets have come a long way since emerging as an asset class. Africa ex-SA stocks are now part of not only Africa-focused or frontier funds, but also appear in portfolios of larger GEM funds. With frequent Africa-focused conferences occurring in London or New York, exposure to the population growth and consumer story is still a strong attraction for investors. This is whilst the low correlation, low volatility story has been shaken by the turbulence experienced by some economies, due to the oil decline.
South Africa’s small and medium enterprises (SMEs) require a less volatile business environment if they are to grow and continue creating employment opportunities. The current challenging economic landscape, which is compounded by economic uncertainty caused by the potential ratings downgrade and the increasing uncertainty around the pivotal role of the finance minister, is rapidly eroding the South African business owners’ confidence levels and the calls for a strong and stable political framework to facilitate the country’s economic recovery is growing increasingly louder.
Africa remains an active region with significant potential; a recent report has revealed that healthcare continues to match financial services for growth and reward opportunities.
In April 2015, the South African Financial Services Board (“FSB”) released Board Notice 52, declaring all hedge funds to be regulated hedge funds, falling under the Collective Investment Schemes Control Act (Act 45 of 2002) (“CISCA”). A collective investment scheme (“CIS”) can be described as an investment product that allows many different investors to pool their money into a portfolio. Unit trusts were the first collective investment scheme to be offered to investors in South Africa. Hedge Fund Managers, needing to comply with CISCA were now required to either register for their own Management Company (a registered Management Company as defined under CISCA, section 42) or to platform with an existing Management Company under a co-naming white label arrangement.
Companies that have the ability to re-invest capital for growth over long periods of time, while still generating great returns, are well worth the hunt. The incremental compounding of shareholders’ wealth that results from effectively re-investing in growth can generate spectacular returns for long-term investors. However, growth alone is not enough; it needs to be ‘good growth’ that increases per share value for investors.
While the last couple of years have been tough for African equities and currencies, we believe the long-term case for investing in Africa remains intact. The worst commodities bust in a generation, the strengthening of the US dollar and indigestion in frontier and emerging equity markets have left many African stocks trading at valuations not seen in years.
With less than a month to go before they have to disclose an Effective Annual Cost (EAC) on quotes for savings and investment products, product providers are no doubt scrambling to get their calculations done and their point of sale documentation updated. The deadline is October 1 to comply.
The provision of banking and financial services in South Africa is a highly regulated activity and the revolutionary Fintech (financial technology) is posing a significant challenge to the current regulatory framework. The challenge has been acknowledged by the South African Reserve Bank (SARB) in its position paper on virtual currencies issued in 2014.
The recent loss reported by Och-Ziff Capital Management Group, the largest publicly traded hedge fund in the US, was attributed to a $400m provision to settle bribery charges brought by the US Department of Justice related to the fund’s dealings in Africa. Paradoxically, while news like this has nothing to do with hedge funds in Africa, it reinforces the uncomfortable fact that skittishness from investors outside the region means that hedge funds in Africa are held to the highest standard.
If you own equity in South African companies that derive most of their income from business activities within South Africa, you might need to start adjusting your thoughts about what they are really worth, despite their current market prices. According to African investment specialists RisCura, the fundamental value of such equity investments have declined by as much as 49% in dollar terms between December 2014 and March this 2016. Yet this is not being reflected in asset prices.
