The political situation in Ghana, which had been a model country for the western donor community, is deteriorating. There have been demonstrations against President Nana Akufo-Oddo and growing criticism of the government within the populace. Indeed, opposition politicians are trying to push Minister of Finance Ken Ofori-Atta and his deputy Charles Adu Boahen out of office on the grounds that they have mismanaged the economy.
The background to the government’s woes: Since early October, the local currency cedi (GHS) has lost more than 30% against the euro and 53% since January. Inflation in Ghana is currently 40%, or the highest level for 21 years. Interest rates, meanwhile, stand at nearly 25%, and debt servicing is expected to eat up 47% of the government’s revenues in 2022.
President Akufo-Addo believes the country can still meet its financial obligations. He is currently negotiating with the International Monetary Fund (IMF) to obtain a USD 3 billion loan. The loan normally comes with the condition that the borrower push through tough political and economic reforms. Whether that happens, remains to be seen. Ofori-Atta, meanwhile, faces an enquiry by a parliamentary committee regarding the government’s handling of the crisis. The finance minister is to present the 2023 budget later this month.
The Ghanaian government blames its troubles on the Covid pandemic and Russia’s war against Ukraine. But this is not the entire story. Ghana’s mess started when John Mahama, Akufo-Addo’s predecessor as president, borrowed too much in hard currency on international bond markets. Ghana was helped in that effort by US investment banks. Later, Mahama’s government put too little of the proceeds to productive use.
As long as the government’s financial woes continue, international and domestic investors are staying away from the Ghana’s financial markets. This has led to a severe decline in liquidity of Ghanaian stocks. Even blue chips such as Total Petroleum Ghana (ISIN: GH0000000144), Unilever Ghana (ISIN: GH0000000219) or Guinness Ghana Breweries (ISIN: GH0000000102) are hardly ever traded. Just 35 Guinness shares have, for example, changed hands since 16 September.
For decades, investors have followed the same pattern: In a bull market, they pay more attention to small caps, and in a bear market they tend to focus on blue chips. The reason behind this is: Small caps allow investors to bet on promising business models but are less liquid. Blue chips, on the other hand, are bets on established business models and are very liquid.
The Nairobi Securities Exchange (NSE) seems to confirm that investors are focussing on blue chips in the bearish market of 2022. While the broader market index NSE All Share is down 14.7% this year, the blue-chip index NSE 20 has gained 12.4%. But investors have also been very selective regarding Kenyan blue chips.
First the blue chips that are in favour: They include banking group NCBA (ISIN: KE0000000406, EUR 393 million market cap), which has gained 19.4% and Stanbic (ISIN: KE0000000091, EUR 312 million market cap), which has gained 14.3%.
Other blue chips have been hit hard. These include telecom operator Safaricom (ISIN KE1000001402), which has lost 33.5% since the beginning of the year. With a market cap of EUR 8 billion, Safaricom is still the heaviest stock on the NSE. The utilities company KenGen (ISIN: KE0000000547, EUR 172 million market cap) has also lost 21.5% since January.
Investors have been equally fickle regarding Kenyan small caps: For example, advertising group WPP Scangroup (ISIN: KE0000000562, EUR 11 million market cap) has lost 26.3% this year. Also, the insurance company Liberty Kenya (ISIN: KE2000002168, EUR 20 million market cap), is down 31.3%. But real estate company Ilam Fahari I-Reit (ISIN: KE5000003656, EUR 10 million market cap) is actually up 4.8% since January.
If liquidity is important to you, you should stick to blue chips in the current environment. Small caps, meanwhile, are very tricky bet in this environment.
Moroccan mining company Managem (ISIN: MA0000011058) is involved in the extraction of a vast array of metals and other elements. These include: copper, zinc, lead, gold, silver as well as cobalt and fluorine. Since January, its share has gained an impressive 38.9% to MAD 2266 (EUR 204.47).
It’s an ideal environment for Managem: As global supply chains are over-stretched, western economies are looking for new sources of metals and other raw materials that are reliable and closer geographically. As Managem is well-managed and operates in a well-governed country, it seems like a good fit.
However, investors have begun to sour on the stock: The share lost 6.3% of its value in the past four weeks. As a result, it is 8.9% below a year-high of MAD 2532 (EUR 228.48) reached on 26 September. Investors seem concerned about Managem’s future profitability. This is because analysts at Moroccan investment bank BMCE Capital project that the company’s earnings per share (EPS) will fall 16% to MAD 139.60 in 2023 from MAD 165.40 this year.
South African oil and chemical company Sasol (ISIN: ZAE000006896) finds itself in a difficult situation. Let us explain: The company is dominated by institutional investors that hold roughly 60% of its shares. Included in this shareholding are state-owned institutions Public Investment Corporation (17% stake) and the Industrial Development Corporation of South Africa (8.5% stake).
Several asset management companies are also big investors in Sasol. UK-based M&G Investment Managers has, for example, a 5.9% stake. Other managers include Allan Gray, Vanguard, Coronation, Ninety One, Old Mutual Investment and Sanlam Investment Management. Taken together, all of them own nearly 12% of Sasol.
So why is this an issue? Well, the asset managers could be forced to further reduce their exposure to Sasol in this difficult market environment. Sasol’s share has already lost 23.9% to ZAR 301.30 (EUR 16.74) in the past six months, and many equity funds are still suffering from investor outflows. These facts, in turn, could compel the fund managers to further reduce their exposure to Sasol – reinforcing a downward spiral.