African Equities Outlook: Leaving Lagos…
My colleagues and I at Business Monitor International (BMI) frequently initiate or exit positions in our in-house mock portfolio, a practice which regular readers of our online service and weekly Emerging Markets Monitor magazine will be familiar with. Today, I shed some light on BMI’s Africa portfolio.
Given the current correction in global stock markets and oil prices and an uptick in investor risk aversion, I have decided to exit BMI’s long Lagos All-Share Index and Mauritian SEMDEX trades in our mock portfolio. The technical and fundamental pictures for both look less appealing now, and my colleagues in the Africa team prefer to lock in gains of 8.6% and 27.0% respectively.
Indeed, with front-month Brent crude having topped out and retraced back through support at US$67.70/bbl on June 22, BMI has also instituted a bearish oil trade position in its Key Market View matrix, targeting US$57.00/bbl. While the Nigerian Lagos All-Share Index (LASI) is dominated by financials and not directly driven by oil, now seems a good a time as any to exit our bullish LASI trade.
Nigeria – Lagos All-Share Index (LASI)
By my reckoning, the potential spill-over effects on foreign currency inflows and fiscal revenues of weaker oil prices – coupled with precarious output – make the fundamental backdrop more uncertain and could undermine confidence in domestic banks, and equities in general for that matter. After closing at 28,627.29 on June 22, the index has not quite hit key support at 27,500, but with BMI’s bearish oil outlook expected to manifest itself in Nigerian equities, I have decided to lock in gains at 8.6%, given our outright bearish view on oil.
Over the longer term, however, I believe that the index could recover some of its late 2008 losses, buoyed by the prospect of better banking regulation, the possibility of the new central bank governor, Lamido Sanusi, easing restrictions on foreign ownership of domestic banks, firmer oil prices, and the eventual return of risk appetite.
Similarly, given the close correlation of the Mauritian SEMDEX with international risk appetite, BMI is also exiting its bullish trade on Mauritian equities. Only 2.0% off our 1,500 target, I seek to realise profits of 27.0% since instituting our bullish view at 1,158 on April 17. Trading at 1,470 at one point on June 23, the index was testing four-week support on a daily chart, but given the correction in global equities under way – the Dow fell 2.6% on June 22 to a four-week low of 8,339 – I would rather lock in gains than risk further losses.
Mauritius SEMDEX Index
By early afternoon (local time) on June 23, the SEMDEX had given up initial gains, and broken through support on an hourly chart, which suggests the likelihood of further downside, especially if it closes the day weaker. Indeed, a number of momentum indicators, notably the Relative Strength Index and MACD, suggest that the index is overbought, at least in the short term.
BMI is, however, staying long on Ghana’s US$ 2017 global bond. Trading at 11.87% at one point on June 23 – a 274 basis points (bps) gain since initiating the trade at 14.61% in mid-April – the bond gives investors exposure to Ghana’s anticipated macroeconomic improvement once domestic oil production starts (while avoiding currency loss against the depreciating cedi).
Ghana – US$ 2017 Bond, Yield (%)
But Ghana is not an oil play just yet, and so BMI’s short-term bearish stance on oil is likely to affect the global bond much less than Nigerian equities. With BMI’s longer-term oil outlook still anticipating higher prices, I do not believe that the bond will be affected significantly. Rather, I see further upside towards our 11.50% target yield as I expect the World Bank to announce on June 30 the approval of an interest-free US$300mn loan, the first slice of US$1.2bn of assistance agreed by the Bank for Ghana over the next three years. Nevertheless, BMI is maintaining a relatively tight stop at 13.00% should global risk aversion see the instrument retrace.