But some pockets of positivity in Zimbabwean shares
While most African markets underperformed the MSCI World Index (total return) last year, if you had invested in Nigeria, you would have been a clear winner. In US dollars, the MSCI World returned +16% in 2020 compared to -9% for Kenya, -22% for Egypt and +2% for Morocco. Nigeria was the notable exception at +24%.
“The strong performance of Nigerian equities in 2020 was driven by investors seeking alternatives to low fixed income yields and foreigners struggling to repatriate funds. But, the likelihood of a further naira devaluation remains high, so investors should remain cautious,” says Kamal Govan, portfolio manager at Allan Gray. “We expect resolution over the coming months as pressure mounts within the Nigerian economy.”
Govan currently sees opportunity in Nigerian Breweries, part of the Heineken stable and a dominant brewer in Nigeria, with a leading position across the value segment of the market. This is despite intense competition as International Breweries, part of the AB InBev group, attempts to rapidly gain market share.
“Nigerian Breweries has done reasonably well to defend its position. The business is well managed and positioned favourably to perform as competition becomes more rational, but especially if the local operating environment improves. Nigerian Breweries’ current market capitalisation (around US$1.1 billion) is a fraction of its 2014 peak (around US$8.7 billion).”
The investment manager recently amended how holdings listed on the Zimbabwe Stock Exchange are valued.
“Previously we valued our Zimbabwean shares at the lower of the market price or our estimate of fair value, in the instances where we thought equity prices did not reflect reality. The situation has sufficiently changed for us to resume using market prices and the official exchange rate,” explains Govan.
Foreign exchange auctions in Zimbabwe have continued to take place weekly since late June 2020.
“We are encouraged both by the value traded (about US$625 million since the first auction) and the stable exchange rate that the system has fostered.”
In addition to locally listed Zimbabwean investments, the Allan Gray Africa ex-SA Equity Fund has meaningful positions in offshore-listed Zimbabwean businesses. Caledonia Mining is listed in the UK and US, and Zimplats is listed in Australia.
“Both of these entities are crucial sources of foreign exchange for the Zimbabwean government and we are cognisant of this risk. More fundamentally, both companies are currently benefiting from favourable precious metals prices, which should mean that they will generate significant amounts of free cashflow. We estimate that Zimplats is trading at a multiple of less than two times spot earnings. Both companies have net cash positions on their balance sheets and are therefore in a position to return healthy amounts of cash to shareholders,” concludes Govan.