The Kenyan equity market continued its recovery, rising strongly. The political situation in this East African country has improved greatly since the incumbent president and the opposition leader agreed to unite the various political factions. This development encouraged the central bank to reduce key interest rates in order to stimulate the economy. The financial sector was particularly well served by speculation that the controversial law that has prescribed a ceiling for lending rates for the last two years would be changed to the banks’ advantage.
In Nigeria, the positive economic growth of 2017 was reflected in the local stock market. It was particularly pleasing to see Nigerian banks finally starting to close the valuation gap between themselves and the other frontier market banks. The stabilisation of the oil price between USD 60 and USD 70 per barrel increased the confidence of international and institutional investors that Nigeria's economy would be on a firm footing in 2018.
South Africa was in a very tense situation in the last quarter. The leader of the ruling National African Congress party, Cyril Ramaphosa, was elected president of South Africa, a political change that brought the former finance minister, Nhlanhla Nene, back to power. This step was welcomed by most investors and rating agencies, particularly Moody's, which confirmed the country's investment-grade rating. These positive developments boosted the local equity market. However, in the last two weeks of the quarter, the South African equity market gradually lost these gains in the course of a worldwide correction and slipped into negative territory.
Gold mines were the biggest losers in the first quarter of 2018. It is difficult to explain this weak performance in the face of a firming gold price. We assume that worries over an aggressive increase in US interest rates are the reason for this underperformance, but we think these concerns are exaggerated. The present relationship between gold mines and the gold price does not correspond to the current direction of the gold price. History also shows us that the gold price has upside potential in the later phases of a rising US interest rate cycle. We believe that gold mine prices will soon enter a bull market, so we are correspondingly positioned with an investment in cheap mines.
Qutlook
We view the coming year optimistically as regards African equity markets. Progress in democratisation, economic reforms and rising oil and commodity prices form a good basis for positive development. International investors will doubtless also take these markets into consideration.