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All I Want For Frontier Markets In 2018

Oliver Bell, Portfolio Manager, Frontier Markets Equity Strategy

After being plagued by drought and economic stagnation last year, 2018 could be the year Africa returns to focus for all the right reasons. While not a country in the Frontier Markets benchmark, the economic health of South Africa has ramifications for a large part of the vast continent. We witnessed positive political developments in South Africa at the end of 2017, with the ruling African National Congress party electing business and market-friendly candidate Cyril Ramaphosa to be its next president. This has been followed in February by his ascension to National President.

We have high hopes this will mark a reform inflection point and begin the unwinding of the alleged state capture presided over by former President Jacob Zuma. Ramaphosa is expected to unveil his plan of action in the coming weeks and, combined with an anti-corruption drive, we will hopefully see billions of US dollars of investment by corporates, local pension and insurance funds unlocked.

Good things may well come in pairs, as the positive development in South Africa unfolded only a month after President Robert Mugabe was ousted after 37 years as President of Zimbabwe. We welcome the change and hope to see fully free and fair elections this year, which would provide much needed legitimacy to the government. This should also free up substantial investment dollars to re-invest and help re-establish the former ‘bread basket of Africa’. As investors in listed equities, we would welcome a return to what was previously one of the largest and most-liquid stock markets on the continent.

As the backdrop in South Africa improves, it will have a positive knock-on effect to neighbouring countries – such as Namibia, Botswana and Zambia. Commodity producer Zambia has been benefitting from some recovery in the copper price, but this tailwind must be cemented by finalisation of their pending IMF deal, which has yet to be fully agreed. Hopefully, Mozambique will see an end to the effects of the ‘Tuna debt’ crisis and a resumption of previously sky-high GDP growth rates – supported by investment in its extensive gas fields.

Opening Quote Our biggest wish of all this year is for the positive recent political developments in Africa to lead to a real reversal of economic fortunes. Closing Quote

Tanzania could be on the cusp of a new positive era, should we note clear evidence that President John Magufuli’s clampdown on select industries is genuinely an anti-corruption drive. Although not a Frontier country, we also keep watch on Egypt given its relative importance to regional growth. After the devaluation of its Egyptian Pound in 2016, we have seen a sharp rise in inflation and look forward to a domestic recovery and the re-election of President Abdel Fattah el-Sisi.

Following recent elections the President of Kenya, Uhuru Kenyatta, will now start thinking about his legacy. The most important development to watch is a lifting of caps on interest rates charged by the banks. The cap has meant banks have not been able to price risk sufficiently and has withdrawn credit extension from the economy – particularly in the SME area, which is the life-blood of any thriving economy. As for Morocco’s economy, it is well positioned to benefit from continued momentum in the European recovery. Ongoing calm in relation to Islamic extremism is also a must, due to the importance of its tourism sector. In Nigeria, we want to see unification of all the various exchange rates, as well as for the resulting official exchange rate to be free-floating. This would provide the necessary confidence for significant foreign re-investment in the country and accelerate the economic improvement which now looks to be underway with help from a stronger oil price.

In the Middle East, after a good year for Kuwait equities in 2017, we require further confirmation that the hangover in the domestic banking system, following on from the 2008 financial crisis, has ended. In tandem, we are watching for continued crane movement as evidence that the government remains necessarily focussed on important infrastructure projects. It was a fairly tumultuous year in Saudi Arabia last year, where Crown Prince Mohammed bin Salman consolidated his power base and initiated a raft of reforms to bring the Saudi budget under control with less reliance on oil. Having arrested a number of members of the royal family and high profile business leaders on corruption charges, a period of calm is now needed to ensure there is no blowback.

The two main concerns in Oman remain its susceptibility to the oil price and the question of who will succeed ageing Sultan Qaboos bin Said al Said. If we get clarity on the latter and the start of proper reform to acknowledge the lower oil price environment, Omani equities would become interesting again.

In Europe, less aggressive fiscal stimulus and tighter monetary policy would be welcome in Romania, to ensure the current cycle endures and does not get out of control. Georgia needs an ongoing commitment to meeting its IMF targets and for GDP growth to finally reach its potential of at least 5%. The smaller economies of Lithuania and Croatia are finally in recovery mode after suffering long hangovers, inflicted by the global financial crisis and related property crashes. In 2018 we seek a continuation in economic recovery trends such as falling levels of debt, improved labour market dynamics and increased fixed investment.

Looking towards Asia, we would like to see a continuation of strong foreign direct investment trends in Vietnam and an ongoing recovery of the domestic economy – with inflation remaining low. Sri Lanka requires its large pipeline of investment projects to start in earnest. We also hope the country can avoid a repeat of flooding, which caused considerable pain for consumer businesses in 2017. However, this does provide a low base for consumer sector earnings this year. Bangladesh will hopefully soon see an end to the currency volatility that appeared in December, as well as smooth and peaceful elections towards the end of 2018.

Finally, in Argentina, we are laser-focused on inflation and need to see it continue its decline below 20%, in line with President Mauricio Macri’s recently re-issued inflation targets. We would also welcome further reform progress and acceleration of the domestic recovery.

Our wish list for 2018 may be long, but positive news can travel fast across the Frontier universe – where small, positive changes can quickly lead to the unlocking of vast economic potential. While we have witnessed many examples of this in Asia and Latin America, our biggest wish of all this year is for the positive recent political developments in Africa to lead to a real reversal of economic fortunes.

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201801-370883

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