Register for free: https://capitalnewsafrica.com/
The gold price has been particularly volatile this year. A few days following Russia’s invasion of Ukraine on 24 February, the price jumped 14% to USD 2043 per ounce (31.3 grams). But by 20 July, the gold price had fallen to USD 1698 before rising again to USD 1802 on 12 August. Since then, it has fallen another 8% to USD 1657 – its lowest level since April 2020.
Shares in African gold mining companies have been caught up in this volatility. One prime example is South Africa’s Gold Fields (ISIN: ZAE000018123), the largest gold miner on the continent as measured by a market cap of EUR 7 billion. Although Gold Fields’ share is up 16.9% to ZAR 145.22 (EUR 8.26) for the last twelve months, it is down by 19% since January and even by 37.9% since April. Last week, the share recouped some of its losses this year by gaining 12.9% in five trading days.
Meanwhile, shares in Anglogold Ashanti (ISIN: ZAE000043485) have come back even stronger. After being down 26.2% since January, the share price rose 8.3% last week to ZAR 247.53 (EUR 14.08).
Investors are now asking themselves, have African gold mining shares reached the turning point or is this what traders call a “bull trap”? A bull trap leads an investor to believe that a stock’s downtrend has ended before it has.
Gold is a hedge against inflation, which currently is very high. So why hasn’t the gold price surged but rather trended downward? US billionaire John Paulson gave this explanation in an interview with Bloomberg: The downward trend in gold may end if the US central bank (Fed) is unable to tame inflation by raising interest rates. Paulson noted that while the current inflation rate was high, market expectations were that in the long term, it would come down significantly. We would like to add: Investors in African gold mining shares should, therefore, pay close attention to the Fed’s current battle against inflation.
High inflation combined with rising interest rates in the developed world are dampening global economic growth and leading to an appreciation of the US dollar. As the year began, the EUR-USD exchange rate was 1 to 1.137. Now only USD 0.97 is needed for EUR 1.00. European investors in US stocks are now benefitting from an exchange rate gain.
On the other hand, the strong US dollar is undermining US investors in Africa. While in past years, most African currencies had a stable exchange rate to the USD, that changed this year. For example, the South African rand has depreciated against the dollar, dropping to ZAR 17.9 per USD 1.00 from ZAR 15.9 per USD 1.00 at the start of the year. For USD investors, this results in a loss of almost 10% in just nine months.
As Standard & Poor’s (S&P) points out in a blog post, the strong US dollar has depressed the value of dollar-denominated investments in nearly all emerging markets. Writes John Welling, director of global equity indices at S&P: “International US holdings have decreased when translated back into a stronger dollar, compounding the weak underlying market performance.”
Indeed, while the S&P South Africa BMI index is only down 3.9% in the local currency, dollar-denominated investors have lost 13.4%. As a result, South African stocks would have to outperform those in the US by almost 10% to compensate for the negative currency effect. Here are some other examples: In US dollar terms, Nigerian stocks are down 4.2% since January; those in Kenya 5.1%; those in Morocco 11.28%; and in Egypt a glaring 16.1%. In the local currency, however, Nigerian stocks are actually up 8.7% since January.
It should therefore come as no surprise then that US investors have cut their exposure to African stocks, bonds, and private equity. That said, it is still a fact that African markets are performing better than those in the developed world. That gives hope that one day, US investors will return to Africa in a big way and help boost its markets.
If you only read Western media, you might think that the only investors in African start-ups are American and European investors. As the example of Moroccan bank BMCE shows, however, that is inaccurate. BMCE’s asset management company has set up a venture capital fund called “Fonds Capital Venture” that will finance Moroccan start-ups
The fund will start small with just MAD 50 million (EUR 4.6 million) in assets. However, Fonds Capital Venture could have quite an impact, as the fund’s managers do not need that much seed money to make a difference. According to BMCE, Fonds Capital Venture provides finance to start-ups in their early stages.
BMCE is not the only Africa-based investor to have discovered venture capital. Recently, Egypt’s Endure Capital has completed the first close for a new USD 50 million fund that will invest in African start-ups during their early stages.
Eveready East Africa (ISIN: KE0000000588) is currently among the favourites on the Nairobi Securities Exchange. Shares in the Kenyan battery supplier jumped 14.1% last week to KES 0.81 (EUR 0.0069). Eveready East Africa supplies dry batteries under the Eveready brand; alkaline and rechargeable batteries under the Energizer brand; car batteries under the Turbo brand; and finally, flashlights, detergent and cleaning products.
Until recently, Eveready East Africa’s financial results were not looking good. For the financial year ended 30 September 2021, net income was a negative KES 34.7 million (EUR 294,000) on sales of KES 89.8 million (EUR 760,000). Its price/earnings ratio (PER) is currently negative 7.02.
The rally in its stock has to do with investor expectations that the company will turn the corner. There is some evidence to support this optimism: Non-audited results for the first half year that ended 31 March showed that Eveready East Africa cut its loss to KES 8.4 million (EUR 71,100) from KES 26 million loss (EUR 220,000) in the year earlier period.