Review
African markets followed the downward trend of the global capital markets and closed the first quarter of 2020 on a strongly negative note. The entire African economy was afflicted by the domino effect of coronavirus, resulting in a sharp drop in all the major stock markets on the continent. Investments by European investors suffered particularly under these circumstances, as the loss in value of shares as well as currency depreciations had a significant impact on results.
The Nigerian stock market suffered a double blow: both the curfew and the border restrictions to protect against coronavirus had a negative impact on the West African economy. And although several countries are seeing light at the end of the tunnel after coronavirus, the current oil market crisis means Nigeria will still be in a difficult position. Oil prices reached historic lows in the last quarter after Saudi Arabia and Russia failed to reach agreement on reducing production to support the price. We assume that the West African economy could be stabilized with an oil price of USD 40. Since the current oil price is self-destructive, we believe that oil-producing countries will eventually find a joint way to increase the price of crude oil.
The situation in South Africa was not much better, as this country also had to contend with two negative factors. In addition to the impact of the coronavirus epidemic, South Africa lost its investment grade status after Moody's downgraded the country's rating. In the last quarter, the South African currency, the rand, lost more than 25% of its value. Commodity prices are under significant pressure anyway as the extent of the impact of the coronavirus crisis on global economic growth is still unknown.
In the last quarter, gold mines fell in value as well. Although this may be regarded as illogical and confusing, since gold is generally considered a "safe haven" in times of crisis, this phenomenon was seen back in 2008. That year, gold mines declined in value too, as the banking crisis had led to a series of sell-offs across all assets. Nevertheless, they recovered a year later to record high profits and reach new highs. We are convinced that gold mines will have upside potential in the coming quarters. The coronavirus epidemic forced central banks and governments to loosen and adjust their monetary and fiscal policies even further. In addition, the US presidential elections in November 2020 pose a political risk. History teaches us that crises can lead to profound political change when the population is dissatisfied with the measures and results of crisis management.
Outlook
We expect the generally good prospects for African investments to remain intact after the crisis. The recent correction in global equity markets could be an opportunity to enter the market. Widespread Internet use will enable a digital transformation of the continent. Africa's considerable potential, due to high growth rates and the ever-increasing young population, will certainly continue to be viewed positively by international investors.
Ahmed Helmy, Dr. Kohlhase Vermögensverwaltungsges. mbH