Expect increased risk in South Africa
December was a dismal month on most African stock and currency markets. The South African market fell a modest 1.5 percent but the currency weakened almost 10 percent, leaving a drop of 12 percent overall in SEK, says Karin Fries fund manager of Carnegie Afrikafond.
The only stock market that rebounded was Egypt, rising sharply during the final trading days of the year.
In mid-December, South Africa’s president unexpectedly announced he had sacked the finance minister and appointed someone entirely unknown to the market. The reaction was immediate, and the equity, bond and currency markets fell sharply. The decision was not popular in South Africa, and the minister was again replaced after only four days.
It is not difficult to understand the strong market reaction. Ever since the end of apartheid, South Africa has had reputable and strong finance ministers and central bank governors, who have ensured the state acts within its financial capacity. Replacing the finance minister in this way had many questioning South Africa’s internal stability, thus increasing the country risk significantly. It may well take a long time for the market to regain its implicit confidence in the country, and the risk premium in South Africa should be considered to have increased on a more or less permanent basis.
The potential impact of the drought currently affecting all of southern Africa has also created concern, particularly on the region’s currency and bond markets. Harvests are down in many areas, and electricity and water supplies have been reduced, which could lead to higher inflation next year, as well as some social unrest. The continued decline of commodity prices has been negative for the continent’s reputation, impacting stock, bond and currency markets.
Carnegie Afrikafond divested its stake in Imperial Holding, a logistics company in South Africa with a business likely to be further impacted by increased interest rates. The stock seemed relatively expensive. We made a new investment in Mauritius Commercial Bank after its valuation fell significantly, making the stock attractive.