Do not underestimate the influence of exchange rates

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So far this year, exchange rates have benefited investors in African stocks who calculate in euros while working against those who calculate in dollars. Let’s take the West African stock market BRVM as an example: In local currency, the exchange’s index BRVM-CI is up 5.1% since January. This is promising given that many equity markets in developed countries are down. But as the as the news site “African Markets” points out, stocks that make up the BRVM-CI index have actually lost 10.7% in US dollar terms. Euro investors, on the other hand, have gained 2.8% with the index since January.

The Johannesburg Stock Exchange (JSE) offers the same picture: Stocks that make up the JSE ASI index are down 4.8% in the local currency (South African rand), and even 10.1% in US dollar terms. But in euro terms, those stocks are up 2.6% for the year.

Even in instances where the index was down regardless of the currency, euro investors fared better. In Kenya, for example, investors who bet on the equity index for the Nairobi Securities Exchange, the NSE ASI, lost 17.2% in local currency (KES) terms. The minus totalled 21.9% in US dollar terms but was cut to 10.8% in euro terms. Same scenario in Casablanca, Morocco’s financial hub: The broad MASI index lost 8.8% in local currency (MAD) terms, 20.1% in USD terms and 8.8% in EUR terms.

Foreign exchange markets have not been as active as they are this year for a long time. Consider this: The USD/EUR exchange rate was up 13.8% this year to EUR 1.0009 for one USD. The USD/ZAR exchange rate increased by 6.6% to ZAR 17.04 while the EUR/ZAR exchange rate fell by 6.5% to ZAR 17.03.


African bonds offer above-average returns

Bond markets in developed countries have been so unattractive over the past decade that many investors hardly notice bonds from emerging countries and frontier markets. They should take another look.

“Investors may be surprised to learn that the South African nominal bond market has delivered healthy returns to those prepared to brave the volatility in recent years,” wrote Gareth Bern, head of fixed income at UK based M&G Investments, in a recent op-ed. Bern pointed out that in the five years to July 2022, the FTSE/JSE All Bond Index had annual returns of “a surprising 8%,” while the annual return on global bonds, as measured by the Bloomberg Global Aggregate Bond index, was -0.5%.

When considering African bond markets, investors should keep in mind that sovereign bonds from the continent often have sub-investment grade credit ratings. For example, those from South Africa, the continent’s most important economy, have a rating of BB- from S&P and Ba2 from Moody’s. And as we pointed out last week, the credit quality of several African public borrowers has further deteriorated.

Naturally, African bond markets offer investors attractive returns in exchange for the heightened risk of default. The yield on 10-year South African sovereign bonds is currently 10.4%, while the yield on equivalent Kenyan bonds is even higher, at 14.2%. Moroccan 10-year government debt, meanwhile, offers 2.4% annually due to the credit quality of that kingdom. Bern said: “With 10-year yields at just over 11% and longer-term inflation expectations still relatively well-contained thanks to the South African Reserve Bank’s efforts, investors are looking at a prospective real return which should be above 6% per annum over the medium term.” He added that this was “a very attractive return package, particularly when faced with a cash return which will struggle to beat inflation.”


Strong comeback for Aveng

South African infrastructure developer Aveng (ISIN: ZAE000302618) has had a strong comeback. After falling 7.6% in the previous four weeks, the share price recovered last week, gaining 3.1% to ZAR 16.48 (EUR 0.96).

The reason: Aveng CEO Sean Flanagan presented strong results for the financial year 2022 that ended 30 June. Although revenue was up just 1.9% to ZAR 26.2 billion (EUR 1.5 billion), operating profit increased by 7.5% to ZAR 576 million (EUR 34 million). Aveng also cut its debt by 45.3% to ZAR 481 million (EUR 28.3 million).

Speaking during the earnings presentation, Flanagan said: “Aveng continued to build sustainable profitable operations and de-risk the balance sheet through the disposal of non-core assets and reduction of external debt.” Aveng’s Australian subsidiary McConnell Dowell had an especially strong first half, posting a 17% increase in sales to AUD 1.7 billion (EUR 1.2 billion). This was the unit’s highest revenue figure in six years. Flanagan also said he sees strong growth for McConnell Dowell thanks to a well-stocked tender pipeline.

Flanagan’s comments and Aveng’s first-half results seem to bode well for the share. But investors should be aware that there is a lot of uncertainty about the company’s prospects. These include the further course of the Covid-19 pandemic, rising global inflation and the uncertain geopolitical situation.


Investors are wrong about Sonasid

A 20% increase in year-on-year sales to MAD 2.5 billion (EUR 236 million) during the first half of 2022 – this is not bad in these difficult markets. It is even outstanding for a company specialising in steel. But strangely, investors are ignoring the strong results of Moroccan steel maker Sonasid (ISIN: MA0000010019). After gaining 23.4% since the beginning of the year, the share price was down a bit 0.49% to MAD 746.30 (EUR 70.81) last week.

Our view is that investors are unhappy with Sonasid’s capital investments, as they are squeezing its profits. In the first half of 2022, Sonasid investments totalled MAD 22 million (EUR 2.1 million) – more than seven times (MAD 3 million) the year before. The company plans to invest even more in the second half. It says the investments are needed for its programme of operational excellence and for the industrial launch of steel fibre.

We support Sonasid’s decision even if it currently is holding down its profitability. Steel fibre is a new product with high potential for added value. It could become a real growth driver for Sonasid. It is also for this reason why we think investors should keep an eye on the company.