[ M A R K E T
R E V I E W
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A F R I C A ]
The Overall Economic Situation
African markets have had a challeng-
ing few years despite promising GDP
growth in many countries. The collapse in
commodity prices has adversely affected
commodity exporting jurisdictions. The
strong US Dollar and on-going fears about
the Federal Reserve increasing interest
rates have also put the continent on edge.
To cap it all off, China – Africa’s biggest
trading partner – suffered severe market
volatility in 2015 and 2016 which was
strongly felt on the continent.
This is invariably leading to disappoint-
ing performance in African public equity
markets. It is also forcing a number of
economies – particularly those that are
commodity dependent - to diversify. Mar-
ket participants at Fund Forum, however,
recognised any diversification and shift
away from commodities will be a long-
term process. Other commodity-depen-
dent economies have been forced to take
drastic action as their budget and trade
deficits deteriorated. In January 2016,
Nigeria implemented capital controls in
an attempt to nullify further depreciation
of the Naira following the oil price fall.
Equity and fixed income funds
In terms of equity funds in Africa, returns
have obviously disappointed. Unwelcome
regulatory intervention in Kenya - which
saw the government disregard Central
Bank advice and impose a cap on interest
rates on loans and deposits - caused bank
shares to fall in value. Those equity funds
with exposure to Kenyan banking stocks
obviously felt the pain.
Many investors were oversold Africa
initially and have not been impressed by
the performance of fund managers fo-
cused on the region. Investors need to be
properly educated about the challenges of
investing into African markets.
Many of the markets are not hugely
liquid, and this can cause a problem for
daily dealing fund managers. Cobus Visa-
gie, co-founder and managing director at
Africa Merchant Capital, highlighted his
firm had a 90-day redemption period, for
example. This can reduce the need to gate
in the event of mass redemptions. Man-
agers highlight investors needed to adopt
a long-termist approach towards public
equities in Africa.
However, there are some daily dealing
UCITS managers focused on Africa, and
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Global Custodian
Summer 2017
this does raise a few questions about
whether firms would be able to honour
redemptions if positions were found to
be highly illiquid. Launching a US ’40
Act fund with African exposure is not
viable. “The liquidity restrictions limit
the opportunity sets,” said Malick Badje,
director and head of investment solutions
at Silk Invest. The US Securities and
Exchange Commission (SEC) is now in-
troducing rules which tighten up liquidity
requirements at mutual funds in what is
a further dis-incentive for 40’ Act funds
to invest in Africa. In addition, future
UCITS Directives may toughen up on the
eligibility criteria for assets that may be
held in UCITS portfolios.
Some service providers are also occa-
sionally reluctant to provide depositary
activities to a UCITS with a dedicated
Africa-focus, particularly in some of the
higher risk markets. UCITS V makes
the depositary wholly liable for any lost,
stolen or otherwise impaired assets in
sub-custody. Given some African markets
may not have suitably robust insolvency
law, custody law or legal concepts around
trade finality, the risk may be too great for
depositaries to take.
Operating a nimble fund management
business in these illiquid markets is im-
portant, and enables firms to buy into or
extricate themselves from positions over
time without drawing too much attention
to their trading strategies. “Africa can be a
difficult place to invest a large amount of
money,” said Alexander Trotter, partner
at Newmarket Asset Management. Most
firms tend not to run in excess of $250
million when transacting in such markets.
Fixed income has been a bright spot for
some African markets. Yields on bonds
in a number of African markets are high,
in what is a welcome respite from the
traditionally low or negative interest rate
landscape in developed markets. Ghana,
for example, sold $750 million of bonds
yielding 9.5% in what turned out to be
an oversubscribed issuance. However,
trading in local currencies does have its
obvious FX risks. Some markets such as
Nigeria have introduced capital controls
so managers may be unable to get their
US Dollars out of the country if they are
trading Naira. All o