Alpha Capital Monthly Research Newsletter - September 2024

Dear Mwekezaji

September 2024 marked the first monthly net foreign inflow in the equities segment of the DSE Tanzania (DSE) since April 2023. While it may be too early to declare a definitive shift in foreign participation, this development coincides with the first rate cut by the U.S. Federal Reserve since March 2020. The rate cut is a potential catalyst for increased foreign participation, which had significantly dwindled over the past two years due to the U.S. tightening its monetary policy to combat inflation.

The rate cut in the U.S. eases foreign exchange challenges faced by developing economies such as Tanzania, reducing foreign exchange risks and thereby encouraging foreign portfolio investments (FPI). With expectations of further cuts in the U.S. federal funds rate before the end of the year, emerging and frontier markets are likely to experience increased capital inflows.

However, escalating geopolitical tensions in the Middle East present a downside risk to this development, particularly due to the potential impact on global oil prices. In early October, the conflict intensified after Iran launched ballistic missiles in response to the assassination of key Hezbollah and Hamas leaders by Israel between July and September.

Iran, which contributes approximately 4% of global oil supply and holds about 13% of the world's proven oil reserves, is also one of three countries that border the Strait of Hormuz—a strategic chokepoint connecting the Persian Gulf to the Arabian Sea. Approximately 20% of the world's petroleum liquids and liquified natural gas (LNG) pass through this strait, highlighting the risk to global oil supply should Iran's stability be compromised.

Despite U.S. opposition, Israel is reportedly considering a strike on Iran’s oil infrastructure as part of its retaliation strategy. In response to these developments, U.S. crude futures have risen by approximately 8% in less than a week. Goldman Sachs projects that if Israel proceeds with a strike on Iran’s oil facilities, crude prices could increase by as much as $20 per barrel, potentially driving prices to $95 per barrel—significantly above the Bank of Tanzania’s projected range of $72 to $82 per barrel.

Impact on Tanzania’s Economy

A global surge in fuel prices poses two direct risks to Tanzania’s economy. First, higher domestic inflation may result from increased production and distribution costs. While domestic fuel prices in Tanzania have recently declined by 4% on a monthly basis and 8% on an annual basis in October 2024, a reversal of this trend could put upward pressure on inflation, potentially prompting the Bank of Tanzania to maintain a tight monetary policy stance.

The second risk involves a renewal of foreign exchange challenges. Global inflationary pressures may prompt another round of policy tightening, potentially triggering a global recession. Such a scenario would not only diminish foreign participation in Tanzania’s equity markets but also exacerbate foreign exchange pressures facing developing economies.

Equities Market Overview

The equities market at the DSE recorded a 51% decline in turnover during the last month of Q3 2024, with total turnover amounting to TZS 6.93 billion compared to TZS 14.09 billion in August 2024. The decline was primarily due to a lack of significant corporate actions in H2 2024 relative to the first half of the year. But also, a decline in foreign participation, particularly on the selling side, was another factor. CRDB Bank Plc (DSE: CRDB) continued to dominate the market, accounting for 42% of the total turnover, followed by NMB Bank Plc (DSE: NMB), DCB COMMERCIAL BANK TANZANIA (DSE: DCB), and Twiga Cement (DSE: TPCC), which collectively accounted for 45% of the turnover.

Foreign Participation and Net Inflows

Foreign participation in September slightly slowed, although foreign purchases exceeded sales for the first time since April 2023. Foreign purchases accounted for 8.45% of total equity purchases, while foreign sales stood at 8.08%. This led to a net foreign inflow of TZS 25.66 million, a significant improvement from a net outflow of TZS 4.34 billion in August 2024. The cumulative net foreign outflow between April 2023 and August 2024 amounted to TZS 56.34 billion ($20.87 million).

Price Movements

The Tanzania Share Index (TSI) experienced a slight decline of 0.86%, driven by the diminished prices of four counters, notably the two major banks, CRDB and NMB. This downward movement was not offset by gains from five other counters, resulting in a net decrease. Conversely, the All-Share Index (DSEI) registered a modest appreciation of 0.57%, primarily supported by the strong performance of the Kenyan market, where the total market capitalization of the Nairobi Stock Exchange increased by 3.5% in September.

Tanga Cement (DSE: TCCL) emerged as the top gainer on the Dar es Salaam Stock Exchange for the month, with its share price increasing by 20%. This rise followed the announcement of the finalized transaction price between Scancem International D.A and Afrisam for a 68% stake in TCCL, which was agreed at a price of TZS 2,273 per share. As per the initial acquisition announcement made in November 2021, the agreed price between Scancem and Afrisam will also apply to retail shareholders for the remaining 32% of the company. Consequently, this news propelled TCCL's share price to TZS 1,920 in September and mildly trading at TZS 2,100 in early October. While the offer to retail shareholders is yet to be officially floated, it is expected to follow shortly after the conclusion of the transaction.

Other notable gainers included DCB, which saw a 14.3% increase due to speculative trading. Maendeleo Bank Plc (DSE: MBP) gained 12.9% as investors expressed optimism following the TZS 44 per share scrip dividend in August 2024. Swissport Tanzania (DSE: SWISS) also recorded a 10% gain despite not having published its periodic performance for 2024. The company paid a dividend of TZS 51.33 per share in July 2024, maintaining a 50% payout ratio and achieving a 22% increase over the previous year. The DAR ES SALAAM STOCK EXCHANGE (DSE: DSE) was the weakest gainer with a marginal 0.82% increase, reflecting typical price volatility as the stock was well into its ex-dividend period.

On the losing side, Tolgases (DSE: TOL) experienced the steepest decline with a 7.14% drop in its share price. This decrease followed the company’s decision to forgo dividend payments for the 2023 fiscal year due to a 22% drop in profits. TOL reported a 3.5% decline in revenue, primarily driven by a 76% decrease in accessories sales. Additionally, the company faced delays in operationalizing its new Ikama I CO2 plant, which was intended to significantly enhance carbon dioxide production and potentially double revenues. Rising energy costs and power cuts in 2023 further impacted profitability. Despite these challenges, the first half of 2024 (H1-24) saw a remarkable turnaround for TOL, with revenue surging by 62% compared to H1-23. Accessories sales grew more than elevenfold, exceeding the full-year totals for 2022 and 2023 combined. This growth was attributed to the completion of a government project for the supply, installation, commissioning, and maintenance of manifold systems for health facilities in Mainland Tanzania, which drove a 53% increase in net profit. However, this performance has yet to be reflected in TOL’s share price due to uncertainties surrounding dividend payments, inflated by the company’s consistent end-of-year negative net cash flows.

CRDB’s share price dropped by 4.48% as the momentum from its half-year results waned. After peaking at TZS 690 at the end of August, the stock fell back to TZS 640 by the end of September. National Investment Company Ltd (DSE: NICOL) was another notable loser, shedding 3.85% despite announcing a TZS 53 per share dividend and adopting a dividend policy. However, the adoption of the 50% payout ratio policy, which occurred at the end of September, helped NICOL’s price recover by 5.63% during the last week of the month. Lastly, NMB's share price declined by 1.85% as its half-year results lagged behind those of its immediate competitor, CRDB.

Fixed Income Market

Primary Market

In September, the Bank of Tanzania conducted four Treasury auctions, comprising three Treasury bond auctions and one Treasury bills auction. The total value of Treasury securities issued during the month was TZS 695.52 billion, of which TZS 565.29 billion, or 81.3% of the targeted amount, was successfully raised. Treasury bonds represented 82.4% of the total offer size and contributed 86.9% of the total amount raised through these auctions.

The overall subscription rate for the month reached 104.7% of the total offer size, driven primarily by strong demand for Treasury bonds, which accounted for 88.6% of the total tender size. The Bank of Tanzania accepted 77.6% of the total tender size, leaving TZS 162.8 billion in unallocated bids.

The most significant activity was observed in the 25-year Treasury bond auction held on September 4, 2024, which received 59% of the total number of bids for the month and 62% of the total tender size submitted by the public. The auction saw a remarkable subscription rate of 217.8%, while other Treasury bond auctions during the month were undersubscribed. Notably, the 15-year bond auction saw a subscription rate of just 32.4%.

All Treasury auctions in September experienced elevated yields compared to their previous auctions. This trend is consistent with the central bank’s moderately tightened monetary policy stance, which aims to mitigate foreign exchange pressures. However, with a recent rate cut by the U.S. Federal Reserve and the anticipated seasonal inflows of foreign currency, it is unlikely that Treasury yields will continue to rise persistently in Q4-2024, subject to the evolving geopolitical situation in the Middle East.

Secondary Market

In contrast to the equities market, turnover in the secondary bond market increased significantly by 85% in September, reaching a total of TZS 207.01 billion compared to TZS 112.19 billion recorded in August 2024. As is typically the case, long-term tenors dominated the secondary market, with the 15.95% 25-year bond accounting for 52.6% of the total turnover, followed by the 15.49% 20-year bond, which contributed 19.5% of the total turnover.

The trading premium for bonds in September showed a slight appreciation, increasing from 5.09% to 5.88%, signaling a modest rise in bond prices despite higher Treasury yields in the primary market. Additionally, corporate bonds traded during the month amounted to TZS 469.2 million, representing 0.23% of the total fixed-income securities traded in the secondary market for September. The NBC Twiga Bond was the most actively traded corporate bond, accounting for 57.5% of the total corporate bond turnover.

Market Development

The year 2024 has witnessed a significant surge in the establishment of collective investment schemes, with five new funds introduced since the beginning of the year. Among them, the market saw the launch of two new schemes, the Alpha Halal Fund and the Inuka Money Market Fund, during August and September. Both funds focus on investments within the East African Community (EAC) and Southern African Development Community (SADC) regional markets.

The Alpha Halal Fund is notable for being the first ethical collective investment scheme in Tanzania and the country’s first open-ended fund to invest beyond its borders. The fund adheres to Shari’ah principles in both its operations and investments, allocating assets to Shari’ah-compliant equities, sukuks, Islamic mutual funds and ETFs, as well as approved deposits. A dedicated Shari’ah Advisory Board and an internal Chief Shari’ah Officer will oversee the fund’s adherence to Islamic principles, while Refinitiv , a subsidiary of the London Stock Exchange (LSEG) specializing in global financial data, will manage the primary asset screening for compliance. The fund targets an approximate return of 13% per annum.

The Inuka Money Market Fund, on the other hand, invests in money market financial instruments within the EAC and SADC regions. Its asset allocation strategy includes a split of 50% to 60% in current financial assets, such as call accounts, repurchase agreements, fixed deposits, and Treasury bills, with the remaining 40% to 50% directed towards non-current financial assets like Treasury and corporate bonds. The fund's target benchmark is set at 50 basis points above the net yield of the 364-day Treasury bills.

Over the past five years, the collective investment schemes sector has experienced significant growth. Assets under management (AUM) have risen from TZS 470 billion at the end of 2020 to over TZS 2.4 trillion by mid-2024, with the number of schemes doubling over the period. Despite this rapid expansion, the government-owned UTT AMIS remains the dominant player, controlling more than 95% of the total AUM in Tanzania.

The development of collective investment schemes parallels the increase in retail participation in equity and bond markets, highlighting the growing financial awareness within the general public. This trend could present a challenge to commercial banks' deposit mobilization, as retail investors seek more competitive returns, thereby potentially tightening interest margins for banks.

The introduction of the Alpha Halal Fund and Inuka Money Market Fund provides Tanzanian retail investors with access to regional markets, broadening their investment options at a time when domestic demand for financial products is outpacing the supply available in local capital markets.

Outlook and Lookouts

As previously highlighted, during the recent Annual General Meeting, shareholders of NICOL approved a dividend payout of TZS 53 per share. NICOL shares will trade cum-dividend until October 18th, and transition to ex-dividend status on October 21st, 2024. Price movements of NICOL shares will be closely monitored during the remaining cum-dividend period, as market participants react to the dividend declaration. The dividend payment is scheduled to be disbursed on or by November 1st, 2024.

Similarly, Afriprise Investment Company Ltd. is another counter to watch, with a proposed dividend of TZS 13 per share pending approval at the Annual General Meeting set for November 23rd, 2024. Although the per-share dividend remains unchanged from last year, the total dividend amount is expected to double compared to 2023 due to the rights issue conducted in November 2023, which increased the number of outstanding shares by twofold. The price of Afriprise remained stable throughout September but showed signs of upward momentum in early October. The detailed dividend schedule for Afriprise is yet to be announced.

On a broader scale, market outlook remains focused on developments in the Middle East and the potential immediate impact on global oil prices. There is also concern about the risks associated with the escalation and possible expansion of the conflict to involve regional players and their allies, which could have further implications for global markets.

Additionally, attention is on U.S. monetary policy developments as the Federal Open Market Committee (FOMC) is set to convene on November 6th, 2024. The market anticipates a potential rate cut, albeit with a cautious tone given the ongoing geopolitical risks in the Middle East. Moreover, stronger-than-expected employment numbers for September, coupled with expectations of stable core inflation, will weigh heavily on the FOMC’s decision-making process. The next key indicator to watch will be the release of the U.S. inflation data on October 10th, 2024, which is expected to provide further insights into the Federal Reserve’s policy direction.