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Macro Thoughts |
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14-MAY-2018 :: That makes Africa look more like Italy than China via Economist Africa |
Markets have certainly been moving around a lot of late. Everyone has
been transfixed by the Price of Oil with the benchmark Brent Crude
contract topping a 3 and 1/2 year high and $77.00 a barrel last week.
President Trump whose political raison d'être is to expunge and delete
the Name of Barrack Hussein Obama from the record, delivered a
unilateral hard exit from the nuclear agreement with Iran lifting
Crude Oil prices. In fact, President Trump has flipped Obama's Oil
warfare strategy [You will recall Oil prices touched $32.00 a barrel
in President Obama's term in part to bring a recalcitrant Russia to
heel and neuter Saudi resistance to his JCPOA deal] on its head.
Trump, I suspect, is seeking to assist the Crown Prince of Saudi
Arabia up the greasy Kingdom of Saud Pole and the Kremlin is I am sure
not complaining.
The US Dollar has been strengthening across the board. Emerging
Markets Bonds which in late January this year touched a record Low
spread versus the equivalent US Treasury [just above 200 basis points
versus 5 year US Treasuries] blew out. The Spread is at 275 basis
points. Argentina [which incredibly sold a Century Bond just last
year] after dialling up interest rates to an eye popping 40%, has
capitulated and dialled up the IMF's Madam Lagarde. At this point in
the cycle, the IMF's importance for many Countries cannot be gainsaid.
Turkey's Lira crashed to all time Lows. Countries that have been
flying by the seat of their pants are now being caught with their
pants down. This has all the ingredients for baking a good old
fashioned crisis. The Signal in the noise is the yield on 10 Year US
Treasuries, which Yield is around 3%. If we move to 3.5%, we could see
a further round of blood letting.
SSA Governments have tapped the Eurobond markets for more than $15b so
far this year, which is a record haul for any year ever and its not
even June. The IMF in its latest Africa update judged 6 countries to
be in debt distress; Chad, Eritrea, Mozambique [they have lashings and
lashings of Natural Gas which means there is a Pathway out of this],
Congo Republic, South Sudan and Zimbabwe [There is sufficient goodwill
for Zimbabwe to exit this position]. Interestingly, the IMF's ratings
for Zambia and Ethiopia were changed from moderate to "high risk of
debt distress." In Zambia's case, Eurobond yields are nudging double
digits and President Lungu is resisting the only option that is really
available, which is the IMF.
During the IMF's Release, its Africa Head said “The question I ask is
why isn’t a country growing at 6 or 7%?”
Faster Growth is a Panacea. In fact after growing just 1.4% in 2016 [a
more than 20 Year Low GDP Print] the IMF is projecting growth across
sub-Saharan Africa of 3.4% this year. SSA aggregate figures are driven
by the Big 3 Economies of South Africa [about which I am constructive
because of the swing from a scenario of vicious Zuma discount to a
Ramaphoria premium], Nigeria and Angola. All 3 Countries are bouncing
off the bottom. The Proof of the Pudding will be in the Eating,
however, and the sustainability of the rebound. The IMF expects that
income per person will shrink in all three in 2018, for the fourth
consecutive year. That means the Average Individual is empirically
worse off for the 4th consecutive year. The Economist correctly
concludes
''There is reason to worry, then, when the IMF says that regional
growth will hover below 4% for the next few years. Since populations
are rising, income per person will creep up by barely 1% a year. That
makes Africa look more like Italy than China. Better keep praying''
The Daily Maverick cites Nigeria as an example
''For example, Nigeria, Africa’s largest economy, is home to almost
200 million people. Its population is growing at 2.61% per year, with
a median age of 18. But Nigeria’s economy is set to grow by just 2% in
2018. The implications of this are nothing short of disastrous''
Bloomberg's annual Misery Index places six African countries in its
top 10 most miserable countries globally in 2018.
Last week, when Delegates were asked at a @MoodysInvSvc conference in
Lagos [via Bloomberg's Paul Wallace] what they thought were the
biggest risks for African borrowers. They were not worried about
external shocks so much as homegrown ones.
Africa has fully loaded the balance sheet. Notwithstanding a record
breaking Eurobond raise in 2018, Its as plain as day that the current
scenario is a little like Argentina's Century Bond moment, a last
Hurrah! African Governments need to improve their ROI because Envelope
space could evaporate momentarily and in a blink of any eye.
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Computers drive trading in coffee and cocoa markets @FT Commodities |
Are computers driving the cost of your chocolate bar or cappuccino?
Specialised markets such as cocoa and coffee are becoming the next
frontier for the waves of buying and selling generated by algorithmic
trading, which has long since carved out a presence in currencies,
equities and interest rates.
The trend enjoys a powerful tailwind thanks to the money flowing into
systematic macro and an array of quantitative funds, which are seeking
new opportunities to boost their returns. It is also triggering
dramatic shifts in prices for coffee, cocoa and sugar, sparking
concern that these commodities are being divorced from their
fundamentals of supply and demand, traders and brokers say.
“People are looking for more niche markets to deploy that money,” said
Michael Coleman, who manages a Singapore-based $140m discretionary
hedge fund Merchant Commodity Fund. Many of the computer-driven
strategies are searching for risks and returns uncorrelated with other
financial markets.
One group of computer-driven funds active in the commodities markets
are the trend-following “commodity trading advisers” or managed
futures funds. The number of CTA managers trading niche markets has
more than doubled to about 10 over the past couple of years, and
although still relatively small, those funds manage about $15bn,
according to Tom Wrobel, director of alternative investments
consulting at Société Générale Prime Services.
The advance of computer-driven trading, where algorithms execute
trades in anticipation of a market rising or falling, has also been
spurred by the retreat of investment banks and discretionary hedge
funds which in the past supported market making in commodities
markets.
Alongside commodities trading houses, they historically used assets
and global networks to take advantage of dislocations in futures
prices, such as selling raw materials into an exchange where prices
were excessively high. Yet many of the trading houses that once helped
balance the market now focus on profits from processing the raw
materials rather than taking advantage of price distortions, said
brokers.
In the cocoa market, for example, Anthony Ward, the UK-based trader
dubbed “Chocfinger” and known for his multimillion dollar bets, blamed
the rise of algorithmic trading for making profits harder to come by
when he closed his fund last year.
A number of important players in agricultural markets are also feeling
the heat. Producers, such as cocoa farmers and cattle ranchers, and
end users of the commodities including food companies — who also rely
on the market to hedge their risks — have experienced surprising price
shifts.
Many traders and brokers say computerised trading has driven sharp
changes in prices for cocoa, coffee and sugar markets, which have
taken market participants by surprise.
In the cocoa market, the New York price has jumped more than 50 per
cent since the start of the year to a 19-month high of almost $3,000 a
tonne. That punched the New York market to a record spread over the
price of cocoa quoted in London, which was trading at about £1,800 a
tonne.
Jonathan Parkman, co-head of agricultural commodities at broker Marex
Spectron, said the New York cocoa market’s recent run up from the
$2,500 a tonne it was trading at in March “had absolutely nothing to
do with fundamentals”.
Normally, London cocoa trades at a premium to New York, but the
inversion suggested a shortage in the US market, sending a signal to
exporters to ship their beans there in order to meet a scramble for
supplies that did not really exist.
That comes as the coffee and sugar markets have experienced a sharp
rise in bearish positions built by “managed money” — a market category
that includes speculative funds, to record levels.
One reason why momentum-surfing funds are turning to niche assets
reflects how their price movements are not correlated to other
financial markets.
Ewan Kirk, chief investment officer of Cantab Capital, the flagship
fund belonging to GAM, and whose systematic funds manage $4.8bn, said:
“Commodities are particularly interesting because they are very
different from everything else,” adding that soft commodities in
particular were “a very valuable source of diversification”.
High-frequency traders, who transact small positions in a space of
milliseconds, are another group who have pushed into the agricultural
commodities markets.
Jean-Jacques Duhot, chief investment officer at Arctic Blue, a
systematic commodity-focused fund with $200m of assets under
management, said that “high-frequency [traders] have started to enter
the commodities space in a significant way”.
Such automated trading firms generate high levels of volume,
amplifying short-term volatility. “They are very short-term
participants, leading to higher intraday volatility,” he added.
Those who have seen the tectonic shift in other financial markets say
a further push of computer-driven trading into commodities markets,
including smaller ones such as cocoa and coffee, is inevitable.
“Algorithmic trading has moved from fixed income to equities,” said
Thomas Lehrkinder, senior analyst at Tabb Group, a capital markets
consultancy. “The next natural step is commodities.”
One consequence of the sharp swings in prices is a drop in the volume
of hedging flows from those who buy and sell the physical commodities.
The rise in intraday price volatility is making it difficult for some
producers and food companies to maintain their hedging positions,
while others are reluctant to take positions in the face of the
frequent unusual market moves.
“There’s less hedging in the market, that’s for sure,” said Mr Duhot.
Not everyone is alarmed. Some market veterans argue that despite the
rise in volatility, the ultimate direction of the price is always
determined by the fundamentals of supply and demand.
“The fact of the matter is that we need speculators,” said Derek
Chambers, the former head of cocoa at commodity traders Sucden. A
cocoa trader for five decades, Mr Chambers said: “Over time the
fundamentals come into play in the market. Nobody is bigger than the
market.”
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Angolan newspaper Expansao had an intriguing front page cover this week. It declared, "Every Angolan owes $745 to China." Quartz Africa Africa |
It also listed debt to other countries, but debt to China was more
than seven times what’s owed to the next creditor, Israel. By some
estimates Angola owes some $25 billion to China. Since resuming ties
in 1983, Angola has taken $60 billion from China in loans and
investments. The issue for Angola isn’t just that it’s borrowing a lot
from China, it’s also the nature of the debt. As Africa’s second
largest oil producer, Angola’s agreement with China is such that it
uses oil to pay off the debt rather than selling on the open market
and generating cash. This is all well and good when oil is $100. But
it’s risky when oil prices fall. It has caused a liquidity crisis in
the recent past, as well as spikes in inflation.
Meanwhile, as of the end of the first quarter, about 55% of Kenya’s
external debt was to China.
The concern is Uhuru Kenyatta’s government and others before had been
naive in their lopsided dealings with the Chinese, despite
infrastructure construction and other benefits. “Many African leaders
have also been endeared to China by the latter’s deep pockets, most of
whom have grown wary of lectures from their traditional donors from
the West. China’s cash comes with no strings attached.”
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Tanzania cancels licence of @BarrickGold , @Glencore nickel project @ReutersAfrica Africa |
The licence for the Kabanga nickel project in northwestern Tanzania
was among 11 retention licences cancelled by the government under the
Mining (Mineral Rights) Regulations of 2018, which were approved in
January.
A retention licence is granted to holders of a prospecting licence
after they identify a mineral deposit within the prospecting area
which is potentially of commercial significance but cannot be
immediately developed due to technical constraints, adverse market
conditions or other economic factors.
“The Mining Commission would like to inform all owners of retention
licences that the licences have been cancelled,” commissions chairman
Idris Kikula said in a statement.
Barrick Gold Corp and Glencore Plc which own the 50-50 joint venture
project were not immediately available for comment. Their licence was
due to expire in May 2019.
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TPG's Rise Fund makes its first Africa investment @FT Kenyan Economy |
The Rise Fund, the impact fund run by private equity group TPG Growth,
has made its first investment in Africa, leading a $47.5m deal to buy
an unspecified stake in digital payments provider Cellulant.
The deal, which also included Endeavour Catalyst and Satya Capital, is
the largest involving a fintech company that does business only in
Africa, according to the Rise Fund.
“Much of the [fintech investment] activity in recent times in Africa
has been specifically in the consumer lending space,” said Yemi
Lalude, TPG’s managing partner for Africa. “This is different from
that. What Cellulant has is a payment platform that enables people who
have not had access to financial payments to get access in a way that
is transparent.”
Cellulant was founded in 2004 with operations in Kenya and Nigeria. It
now works in 11 countries with 94 banks and seven mobile money
platforms that have a combined potential customer base of 130m. It
focuses on facilitating mobile payments and ecommerce.
Ken Njoroge, Cellulant co-founder and chief executive, said the new
capital would be used to scale up the company’s operations and expand
into two more countries this year.
“The payment market on the continent is [worth] anywhere between $20bn
and $40bn over the next couple of years while all of the fintech
players in the market [currently] collectively generate a little shy
of $2bn,” he said.
Mr Lalude said TPG’s investments were “usually up to seven years, and
this would be similar to that”.
TPG formed the Rise Fund last year, attracting some $2bn in capital.
It aims to be “committed to achieving measurable, positive social and
environmental outcomes” while delivering “competitive financial
returns”. Its board members include entrepreneur Richard Branson,
singer Bono and Jeffrey Skoll, the first president of online auction
website eBay.
Mr Lalude said one of the attractions of Cellulant for the Rise Fund
was that many of its 40m customers had no access to formal financial
services before they started using Cellulant products and services.
Aly-Khan Satchu, a Nairobi-based investment adviser, said he was not
surprised Cellulant had attracted the attention of a major private
equity group, noting that Mr Njoroge had “built a successful business,
grown it organically and delivered for big corporates across the
continent”.
Cellulant’s existing shareholders include Velocity Capital Private
Equity, Progression Capital Africa Limited and TBL Mirror Fund.
Magister Advisors acted as transaction advisers to Cellulant while
Orrick and KPMG provided advised The Rise Fund.
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N.S.E Today |
Millions of voters in Burundi will go to the polls this week in a
referendum that could allow president Pierre Nkurunziza to stay in
power until 2034.
Meanwhile, as of the end of the first quarter, about 55% of Kenya’s
external debt was to China [Quartz Africa]
The Rise Fund, the impact fund run by private equity group TPG Growth,
has made its first investment in Africa, leading a $47.5m deal to buy
an unspecified stake in digital payments provider Cellulant.[FT]
Ken Njoroge, Cellulant co-founder and chief executive, said the new
capital would be used to scale up the company’s operations and expand
into two more countries this year.
“The payment market on the continent is [worth] anywhere between $20bn
and $40bn over the next couple of years while all of the fintech
players in the market [currently] collectively generate a little shy
of $2bn,” he said.
Private sector credit growth touched a high of 25.8% in June 2014, and
has averaged 14.0% over the last five-years, but has dropped to 2.0%
levels after the capping @CytonnInvest
The Nairobi All Share retreated a further -0.79% to close at 175.34.
The Nairobi All Share is +2.418% in 2018 but has corrected -10.8%
since clocking an All Time on the 5th of last month.
The Nairobi NSE20 Index eased -19.97 points to close at 3582.36.
Equity Turnover registered 468.46m signalling supply side is getting
exhausted on this 5 week down move.
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N.S.E Equities - Commercial & Services |
Safaricom eased -1.8% to close at 27.25 and traded 6.003m shares worth
164.473m. Safaricom is +1.869% in 2018 and has corrected -16.793%
since clocking an All Time High of 32.75 on 5th April, which was
coincident with a record close for the Nairobi All Share. Buyers can
safely step up at tis price level. The FY Earnings Release was
muscular.
WPP-Scangroup PLC was marked down -5.405% to close at 17.50 on light
trading of 1,100 shares.
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N.S.E Equities - Finance & Investment |
StanBic Holdings which reported a stellar Q1 2018 Start, firmed
+1.666% to close at 91.50 and traded 132,700 shares.
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N.S.E Equities - Industrial & Allied |
KenGen firmed +0.63% to close at 8.00 and traded 174,800 shares. We
are trading at range lows and a meaningful bounce is expected in the
near term.
KPLC eased -2.189% to close at 6.70 a Fresh 2018 closing Low. KPLC
looks overstretched to the downside.
EABL closed unchanged at 251.00 [+5.46% in 2018] and traded 237,200 shares.
KenolKobil rallied +1.57% to close at 19.40 and traded 2.121m shares.
KenolKobil has surged +38.57% in 2018 on a stake-building operation by
the Tanzanian Rajabaly Brothers. Also supporting the rally has been
some excellent execution and the imminent listing of Vivo Energy at a
price which justifies a higher valuation for similar African
Businesses.
Total Kenya rallied +2.189% to close at 35.25. Total Kenya has rallied
an eye-popping +50.00% in 2018.
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