The economic situation in many African countries continues to pose challenges, with inflation risks and country-specific issues affecting the overall landscape. Despite these obstacles, there are reasons for cautious optimism in certain sectors.

In Nigeria, President Bola Tinubu’s early efforts have created a sense of promise, but further actions and policy adjustments are necessary to fully address the existing issues in the financial system. While some restrictions on the foreign exchange market have been relaxed, they have only partially reduced the foreign currency repatriation backlog. Investors are likely to remain cautious until liquidity returns to the market and the currency is allowed to float freely.

The weakening of the Nigerian naira has led to higher inflation, reflecting the need for a response from the Central Bank of Nigeria (CBN) to address monetary tightening. Dr Olayemi Cardoso’s appointment as the new CBN governor is a positive step, but more measures are required to achieve stability. Currency devaluation has benefited Nigerian banks with net-long US dollar positions, resulting in significantly higher profits for banks like Guaranty Trust Bank, Zenith Bank, and Stanbic IBTC Bank. However, the gains from foreign exchange have been directed by the CBN to be used as counter-cyclical buffers rather than being paid out to shareholders.

In Egypt, the tobacco manufacturer Eastern Company has performed well, with a 35% total US dollar return. The sale of a 30% stake in Eastern to a UAE investment firm has allowed the company to raise fiscal funding and reduce its economic involvement. Additionally, the company’s plans to spin off its real estate assets to investors aim to unlock further value.

On the other hand, Zimbabwean mining company Zimplats has faced challenges, but it has outperformed South African-listed platinum group metal (PGM) miners. The PGM industry is experiencing pricing pressures due to the rising threat of electric vehicles, input cost challenges, and production risks. Despite these risks, Zimplats’ strong balance sheet and strategic position near the bottom of the cost curve provide some defensiveness to its prospects. The company’s investment programme and production track record further enhance its position in the market.

While it is essential to acknowledge the macroeconomic and idiosyncratic risks associated with African businesses, there is cautious optimism for the long-term prospects of these opportunities. The combination of attractive starting valuations and poor sentiment often sets the stage for meaningful future performance.

Overall, there are reasons to be cautiously optimistic about the economic outlook in certain African countries, despite the current challenges.