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Impact of inflation African ex-SA markets 

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Many emerging and African markets are, according to news reports, in a pessimistic market cycle and in tough territory given the higher inflationary environment. 

 

The MSCI Emerging Frontier Markets Africa ex South Africa Index was down  11% in the second quarter of 2022, alongside major local indices Egypt (-20%), Ghana (-13%), Morocco (-10%) and Kenya (-22%), while Nigeria was up 9%.

 

Rami Hajjar, fund manager of the Africa ex-SA Equity Fund at Allan Gray, explains that the US Dollar Index (DXY), a measure of the value of the US dollar against a basket of currencies, has appreciated 9% year to date at end of July 2022, a large move from a historical perspective.

 

“This is a result of both the US Federal Reserve becoming more proactive on interest rate increases and a flight to safety in a highly uncertain environment. There is a negative correlation between the US dollar and emerging market returns. The correlation is direct, given that locally oriented companies earn local currency, and indirect, as companies struggle to pass on forex-input cost increases to customers, placing pressure on margins.”

 

Hajjar explains that the situation has translated into currency weakness and a dry-up of foreign currency availability in some frontier markets, including Egypt, Ghana and Kenya.

 

This is against the backdrop of global reports suggesting that developed market economies may find they are unable to bring price pressures under control without forcing their economies into recession – this is especially difficult for emerging markets, including those in Africa.

 

However, JP Morgan Chase and Deutsche Bank believe emerging markets are well poised to weather the possibility of a global recession, thanks to cheap valuations, higher yields and faster growth.

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