Regional Equity Strategy

  • A number of African equity markets are poised for further losses as US tapering causes money to be pulled out - the Johannesburg All-Share Index looks weak, especially technically.

  • We are removing our bullish view on the Mauritian Semdex from our Asset Class Strategy table with a gain of 1.5%.

  • Although the Nairobi Securities Exchange All-Share Index has been hit we remain positive towards it over the long term.

Emerging market equity indices around the globe have been hit by the ending of the US' extraordinarily loose monetary policy. The cheap money that has flooded into EM markets in recent years is being reduced and repatriated as US interest rates are set to rise, and this has caused a number of the more liquid Sub-Saharan African (SSA) indices to sell off sharply in recent weeks.

We have had a bullish view on the Semdex, the Mauritian benchmark equity index, in place since October 30, when the index stood at 2,055. Our reasoning behind the view was the improving macroeconomic picture in the island economy, where real GDP growth is set to increase to 3.9% in 2014, from 3.1% last year, a strong outlook for the banking sector, and promising technicals. While our fundamental analysis of these dynamics remains unchanged, global uncertainty, especially with regards to the emerging market stock exchanges more heavily exposed to global markets, is leading us to remove the view, with a gain of 1.5%

Closing Out
Mauritius - Semdex Equity Index

Regional Equity Strategy

  • A number of African equity markets are poised for further losses as US tapering causes money to be pulled out - the Johannesburg All-Share Index looks weak, especially technically.

  • We are removing our bullish view on the Mauritian Semdex from our Asset Class Strategy table with a gain of 1.5%.

  • Although the Nairobi Securities Exchange All-Share Index has been hit we remain positive towards it over the long term.

Emerging market equity indices around the globe have been hit by the ending of the US' extraordinarily loose monetary policy. The cheap money that has flooded into EM markets in recent years is being reduced and repatriated as US interest rates are set to rise, and this has caused a number of the more liquid Sub-Saharan African (SSA) indices to sell off sharply in recent weeks.

We have had a bullish view on the Semdex, the Mauritian benchmark equity index, in place since October 30, when the index stood at 2,055. Our reasoning behind the view was the improving macroeconomic picture in the island economy, where real GDP growth is set to increase to 3.9% in 2014, from 3.1% last year, a strong outlook for the banking sector, and promising technicals. While our fundamental analysis of these dynamics remains unchanged, global uncertainty, especially with regards to the emerging market stock exchanges more heavily exposed to global markets, is leading us to remove the view, with a gain of 1.5%

Closing Out
Mauritius - Semdex Equity Index

Our bullish Semdex view had been up by 5.4% on January 10, but the index has sold off by 3.7% over the intervening period. New Mauritius Hotels, which accounts for 6.4% of the market-capitalisation weighted index, has lost 5.7% over the past week alone, while Mauritius Commercial Bank, the largest stock on the index by weighting - at nearly a quarter of the total - lost 1.2%. While we do see support coming in around the 2,025 point at which we entered, the Semdex's liquidity and global exposure makes us wary of the present volatility. As a result so we are removing the view from our Asset Class Strategy table, potentially re-entering at a later date.

The most liquid of all SSA bourses is the South African Stock Exchange, which makes it especially susceptible to the withdrawal of foreign funds as US interest rates rise. Gill Marcus, governor of the South African Reserve Bank (SARB), has warned that South Africa is particularly vulnerable given its twin fiscal and current account deficits. Data from the Johannesburg Stock Exchange show heavy net foreign outflows from both bonds and equities since November 2013, with more likely to follow.

Ripe For A Correction
South Africa - Johannesburg All-Share Index

Further to this, the SARB raised the repo rate 50 basis points (bps) to 5.50% on January 29 in response to the greater-than-expected rate hike from the Turkish central bank on January 28 (a move which took Turkey's overnight lending rate to 12.00% from 7.75%). Although interest rates remain accommodative by historical standards, the 50bps hike (and potential for more) will weigh on growth, with the consumer sector feeling the pain particularly. All of the above bodes ill for stocks, which are looking weak from a technical perspective. The Johannesburg All-Share (JALSH) appears due for a significant correction, perhaps to 40,000 where multi-year trendline support comes in. We are especially bearish towards consumer equities in light of the above, noting that many of the largest listed consumer-facing companies look very overstretched at present.

Although it is less heavily exposed to global market moves than the Semdex and the JALSH, the Nairobi Securities Exchange All-Share Index also fell sharply in late January - January 31 was the worst single day for the Nairobi Securities Exchange (NSE) in over three years. The bourse's All Share Index (NASI) fell by a startling 3.2%, taking the index to 134.66. The biggest losers were among the largest stocks on the index; shares in Safaricom and Equity Bank fell by around 10% over a five day period.

Encouraging Bounce Off Support
Kenya - Nairobi Securities Exchange All-Share Index

Nevertheless, we remain fairly positive towards the index. Fundamentally it is weighted heavily towards the telecommunications and banking sectors, two sectors that BMI's industry analysts predict will perform well in 2014, while from a technical standpoint we are encouraged that the index bounced off trendline support on February 4.

Rally Finally Over
Uganda - Ugandan All-Share Index

Finally turning to Uganda, we can also see the effect of US tapering. Although less exposed to shifts in global liquidity than South Africa or even Kenya, hot money has bolstered a 24-month uptrend in the Uganda All-Share Index, which came to an end in November 2013. While fundamentally we remain fairly positive over the long term, the global outlook has led us to adopt a relatively neutral view over the near term.

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