Closing Bullish Cedi View

We have decided to remove a bullish view on the Ghanaian cedi from our Asset Class Strategy table, with a loss of 3.65% on a total return basis. The view (initiated on August 5) was based on the expectation that news of forthcoming assistance from the IMF would boost investor confidence and the currency - similar to the move seen in the Zambian kwacha in June 2014 when the authorities there announced IMF support.

The cedi has stabilised following the news in early August, but it has not made the near-term retracement that we envisioned. This perhaps reflects investors' lingering concerns regarding the IMF deal, and whether or not it will bring Ghana's fiscal and debt dynamics under control. Few details have been announced and the negotiations (scheduled for September 2014) could become protracted, or even fail - although our core scenario is for an agreement to be struck, mainly consisting of technical oversight and enhanced monitoring of fiscal and debt dynamics.

In spite of the forthcoming assistance, we retain a bearish view on the cedi over a two-year time horizon given that inflation will stay high and the current account deficit will remain significant (see 'GHS: Near-Term Recovery, Long-Term Depreciation', August 5).

Stabilising But Not Appreciating
Ghana - Exchange Rate, GHS/USD

We have decided to remove a bullish view on the Ghanaian cedi from our Asset Class Strategy table, with a loss of 3.65% on a total return basis. The view (initiated on August 5) was based on the expectation that news of forthcoming assistance from the IMF would boost investor confidence and the currency - similar to the move seen in the Zambian kwacha in June 2014 when the authorities there announced IMF support.

Stabilising But Not Appreciating
Ghana - Exchange Rate, GHS/USD

The cedi has stabilised following the news in early August, but it has not made the near-term retracement that we envisioned. This perhaps reflects investors' lingering concerns regarding the IMF deal, and whether or not it will bring Ghana's fiscal and debt dynamics under control. Few details have been announced and the negotiations (scheduled for September 2014) could become protracted, or even fail - although our core scenario is for an agreement to be struck, mainly consisting of technical oversight and enhanced monitoring of fiscal and debt dynamics.

In spite of the forthcoming assistance, we retain a bearish view on the cedi over a two-year time horizon given that inflation will stay high and the current account deficit will remain significant (see 'GHS: Near-Term Recovery, Long-Term Depreciation', August 5).

BMI Sub-Saharan Africa Asset Class Strategy - Closed Views
VIEW DATE INITIATED ENTRY LEVEL DATE CLOSED EXIT LEVEL GAIN/(LOSS) RATIONALE
Source: Bloomberg, BMI. *total return
Bullish GHS vs USD 05/08/2014 3.7139 22/08/2014 3.9000 -3.65* IMF oversight will boost sentiment. Strong carry.
Bearish GHS vs USD 30/11/2011 1.6655 12/06/2014 3.14 14.8* Widening trade deficit and lack of local confidence.
Bullish ZAR vs USD 09/04/2013 10.4638 04/06/2014 10.7762 -2.90% Promising technicals, potential for reform-friendly political change.
Bullish Kenyan 3-Month T-Bills 16/10/2013 10.20% 15/01/2014 10.20% 1.16 Attractive carry amid stable inflation and currency outlook
Bearish Ghana US$2017 global bond 13/06/2013 5.81% 23/10/2013 5.60% -21bps Weak macroeconomic fundamentals including wide budget deficit and sizeable current account deficit
Bullish Nigerian Stock Exchange Index 20/03/2012 21,006 27/08/2013 36526.74 73.9% Improving fundamentals in the financial sector and significant positive business environment reforms.
Bullish Nigerian Banks (BMI custom index) 20/03/2012 992.52 27/08/2013 1686.91 70.0% Nigerian banks are on a solid footing following significant reforms. Asset and loan growth are returning to positive y-o-y territory. Strong economic growth will boost demand for financial services.
Bullish Kenyan Banks (BMI custom index) 12/04/2013 8,031 13/06/2013 7,545 -3.8%* Attractive valuations and healthy macroeconomic climate
Bullish Nairobi Stock Exchange-20 Index 12/03/2013 4,796 13/06/2013 4,838 0.88% Positive post-election sentiment, strong economic fundamentals
Bearish MZN vs US$ 14/06/2012 27.9250 17/05/2013 30.25 8.33% Easing Monetary Policy
Bullish Nigerian 1-year Treasury 25/04/2012 15.60% 24/04/2013 12.08% 352bps Relatively high (and falling) yields and stable naira.
Bearish ZAR vs TRY 24/01/2012 5.1031 18/02/2013 5.0022 -1.9%* Weak fundamentals including a struggling mining sector and widespread industrial unrest in South Africa. Played against TRY given our bullish outlook for the lira and moreover to preserve carry.
Bullish Kenyan Nairobi Securities Exchange-20 29/02/2012 3,304 04/12/2012 4,063 23.0% Valuations were attractive and economic prospects were improving amid declining inflation and interest rates.
Bullish Cote d'Ivoire US$2032 Global Bond 22/11/2011 14.27% 21/11/2012 7.36% 691bps Post-conflict 'reunification' dividend. Positive relations between the president and the IMF augured for debt forgiveneness in 2012.
Bullish Ugandan 91-day T-Bills 04/01/2012 22.72 29/08/2012 13.10 962bps With disinflation quickening and the Bank of Uganda's easing cycle accelerating, we expected yields to come down.
Bearish Ghanaian 91-day T-Bills 17/02/2012 11.02 31/05/2012 19.36 834bps Although yields were attractive in both nominal and real terms, the currency was depreciating swiftly.
Bullish Kenyan 91-day T-Bills 04/01/2012 20.67 30/04/2012 10.08 1059bps Inflation had peaked and the rate hiking cycle was at an end, auguring for lower yields.
Bearish ZMK vs US$ 29/11/2011 5,101 29/03/2012 5,290 3.6% Copper prices were faltering amid sluggish global demand and the government was attempting to increase credit growth.

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