IIMA GROWTH AMID COVID-19
May-July 2020 ISSUE 9
Page of Contents Introduction
2
Post COVID-19:Are We There Yet?
4
African Capital Markets
8
The Food Security Imperative
13
Tourism Sector to Gain from Staycations
16
Youth Employment & Affordable Housing
18
Chasing Alpha During Economic Recovery
21
Regulation & Policy
24
Emerging Innovative Companies in COVID-19
27
ESG Insights
30
Climate Change & COVID-19 Parallels
33
Outlook
37
Global Reset Post-COVID-19
As the northern hemisphere lifts social distancing restrictions and resumes economic activity, one great lesson that we can learn or appreciate from COVID-19 pandemic is the ingenuity, versatility and adaptability of human beings when their backs are against the wall. Over the past three months of lockdown, social media platforms were oozing with such display of creativity, from virtual conferences, virtual music shows and the historic real time communication from the Botswana Government Enclave. With startling statistics of 10,268,786 number of COVID-19 cases, 5,209,809 recoveries and 504,345 deaths around the world, the world managed to hold on to hope and kept moving forward through the use of technology while waiting for a vaccine to be discovered and to be rolled out. The first half of 2020 has emphasized the dire need for the world and its systems to undergo a 360 degrees reset to a more inclusive world that is more compassionate and tolerant of its citizens and also the need to be better custodians of our environment for future generations.
Introduction | Page 2
The short to medium term economic impact of COVID-19 will be pervasive for emerging economies primarily those in Sub-Saharan Africa (SSA) region as SMMEs make up 90% of all enterprises and contribute around 40% of the GDP in Africa. We are already seeing the ramification of economic shutdown with the Botswana economic growth estimated to shrink by 13.1% and the downgrading of credit ratings of many African countries due to disruptions of the global supply chains and shrinking exports. Botswana is well renowned for her prudence in managing the financial affairs of the economy but COVID-19 crisis has exposed the country's heavy reliance in one commodity, diamonds, which always leave her out in the cold when global financial crisis or pandemics arise. The road to economic recovery will see a surge in the adoption of ICT solutions across various industries, diversion of domestic resources to boost healthcare, food security through the agriculture sector and the development of indigenous investment management companies for domestic investments.
Global Reset Post-COVID-19
Introduction | Page 3
"The road to economic recovery will see a surge in the adoption of ICT solutions across various industries, diversion of domestic resources to boost health care, food security through the agriculture sector and the development of indigenous investment management companies for domestic investments. " Lindiwe Mafavuneh Founder & CEO LCM Capital
The Aftermath
Post Covid-19 Are we there Yet?| Page 4
Photo Credit: Yahoo
African leadership for the first time has risen to the occasion by putting on its own cape in the fight against COVID-19 pandemic surpassing everyone’s expectation around the world. This proves that we as Africans have always had the capability, resources and human capital to tackle and solve our own problems when push comes to shove and when there is no help coming from the outside. Botswana is one of the African countries that has done a stellar job navigating and steering the ship in the right direction during these unprecedented times. With 175 COVID-19 cases, 25 recoveries and 1 death, the country has managed to flatten the curve of infections since going into lockdown on 2 April 2020 and now beginning to resume economic activity of key essential and non-essential sectors. Post COVID19; are we there yet? Everyone is wondering what post COVID-19 crisis will look like. Is it going to be an overhaul of how we have been living our lives or old ways will creep into our lives again.
There is no denying that the past two months have been a whirlwind of adjusting to the new normal of home confinement and virtual communication across different media platforms. COVID-19 has introduced a fresh way of doing business that comes with a bargain as many people were able to save money during the lockdown compared to millions spent previously to attend conferences all around the world. Does that mean no per diem for government workers who are frequent fliers post COVID-19? That the new normal would be to log onto a Zoom conference call for a quick catch up with team members or strategic business partners around the world? There is no denying that the biggest winner out of this crisis is Zoom, the virtual meeting platform that was a panacea for employees and students during extreme social distancing directives. . According to the Virtual Capitalist, the online platform is now valued at US$48.78 Billion surpassing the valuation of the World’s 7 biggest airlines at $46.21 Billion, whose market capitalization was eroded due to closed borders.
The Aftermath
Post Covid-19 Are we there Yet?| Page 5
1. Business Trends Zoom meeting participants have skyrocketed in past months, going from 10 million in December 2019 to a whopping 300 million as of April 2020. As of 15 May 2020, Zoom’s market capitalization has skyrocketed to $48.8 billion, despite posting revenues of only $623 million over the past year. Source: Visual Capitalist
The Aftermath
Once again technology is proving to be a formidable force when it comes to achieving swift and tangible results in combating further spread of COVID-19. The government of Botswana through the leadership of the Presidential COVID19 Task Force has launched a contact tracing mobile application called BSafe which serves as a repository of individual data as they visit various service facilities around the country. The objective of the application is to reduce long queues at service providers primarily retailers who had adopted a cumbersome paper registry which was a pain for many patrons of those facilities. Moreover, in the event that there is COVID-19 positive, the real-time information will be used to trace the contact footsteps to mitigate further exposures. We also witnessed the rise of e-commerce on the African Continent with Jumia, Amazon and Alibaba among the 100 best brands in Africa top 100 2020 list. However, infrastructural problems and affordability of data are resulting in teething problems for e-commerce to skyrocket in Botswana and across the African region. According to an online survey conducted by The Local Slice BW digital platform, 42% of participants said they will continue to buy goods online post COVID-19 compared to 58% who still prefer to visit the retail stores. Those who experimented with online buying endured delays as many retailers were not ready yet to cater for high demand resulting in consumers reverting to their old ways of shopping. Post COVID-19, retailers have the opportunity to enhance their infrastructure in order to offer convenience to consumers as they go back to their busy schedules.
Post Covid-19 Are we there Yet?| Page 6
747 Million People with Sim Connections in Africa. Add short body of text
87%
33%
67%
Source: Brand Africa
of Sub-Saharan Africans will have mobile broadband by 2025.
Only 33% of SSAs own a smartphone, while 67% have basic mobile phone in the 6 African countries surveyed.
The Aftermath
“Post COVID-19, 42% of participants said they will continue to buy goods online compared to 58% who still prefer to visit retail stores� The Local Slice BW
Post Covid-19 Are we there Yet?| Page 7
42%
58%
Navigating Through Volatility
Africa Capital Markets News| Page 8
Despite COVID-19 headwinds in February 2020, US$1.5 Billion was raised through IPOs & FOs in Africa in Q1 2020. Q1 2020 AFRICA FO DEALS (US$ MILLION) 1,200
1,000
800
600 1,000
400
200
0 Egypt
Ghana
Morocco L
South Africa
Tunisia
Q1 2020
Source: LCM Capital & MFW4A, PwC
According to the Making Finance Work for Africa (MFW4A) webinar series on Capital Markets in Africa, $1.5 Billion was raised through IPOs and FOs in Africa in Q1 2020 with Basic Materials, Telecommunications and Financial Services sectors accounting for 94.7% of corporate issues. MFW4A stated that US$41.6 million was raised through two IPOs in Africa, Airtel Malawi which raised $28.6 Million and US$12.9 Million raised by Emerald Co. South Africa continues to dominate the African Capital Markets with 84.3% of the share of Africa's FO capital raised in Q1 2020. Review of Africa Capital Markets between 2010 and 2019 showed that 215 IPOs were raised by African companies and on international exchanges raising US$16.9 trillion. 2019 had the lowest number of IPOs in ten years with the highest number of IPOs recorded in 2015 at 32.
"Basic Materials, Telecommunications and Financial Services accounted for 94.7% of corporate issues"
Navigating Through Volatility
Africa Capital Markets News| Page 9
2016-2019 BSEL IPOs 2016 | BTCL
2017 | Minergy
2018 | SeedCo
Over the past 5 years the local capital markets have raised P987M (US$84M) in IPOs.
2019 | BancABC
Although Botswana was not included in the analysis of the 6 largest African Capital Markets by MFW4A, more than 5 IPOs have been recorded over the past 5 years attracting both retail and institutional investors at home and abroad. COVID-19 will further exacerbate the low volume listings as markets
undergo a recovery phase.
Source: Imara Capital Securities :SSA Main Market Indices Performance (YTD)(dotted line indicates Botswana’s lockdown period)
Navigating Through Volatility
Africa Capital Markets News| Page 10
DCI Performance in H1 2020
Telecom. Sector
DCI weakened by 3.03% to 7,267.44 pts from 7,495.55 pts at 31 December 2019. The total equity market
The only BSEL listed telecommunications company
capitalization of the domestic counters decreased to BWP 37.6bn (USD 3.2bn) compared to BWP38.7bn (USD
from BWP 0.95 at the beginning of the year. This saw
4.6bn) at the close of FY 19.
BWP 997.5m, accounting for 2.46% of the domestic
YTD Performance
BTCL’s share price declined by 7.37% to BWP 0.88 the sector’s market cap decline to BWP 924.0m from companies’ total market capitalization. An increase in
3%
mobile revenue is expected, as the usage of mobile phones increased during SOE for application of permits and e-commerce.
YOY Basis from 7,720.60 pts to 7,267.44 pts
6%
Non-Bank Financial Institutions appreciated by 3%
3% Up from BWP 6.7 bn to 6.9 bn
H1 2020
Banking Sector The banking sector’s market capitalization depreciated by 7.14% ytd to BWP 13.4bn from BWP 14.4bn at beginning of the year. In response to the economic strains posed by the COVID-19 pandemic, the banking sector responded with loan repayment moratoriums and discounts, in some cases fee cancelations to services provided.
" As we enter the
economic recovery phase & workers reenter their working places, a drastic dip in mobile phone usage during the day is expected which will offset gains in H1 at the end of the year"
LCM Capital Research & Analytics Unit
Navigating Through Volatility
Africa Capital Markets News| Page 11
FMCG Sector COVID-19 Impact, the Fast Moving Consumer Goods (FMCG) sector grew by 0.40% to a market cap of BWP3.2bn from BWP 3.1bn as a result of Sefalana’s 0.56% share price gain to date this year. The sector contributed 1.03% and 3.76% to volume and value traded on the domestic bourse, respectively, with 1.3m shares worth BWP 11.8m changing hands.
Services Sector Services sector registered 0.41% decline in market cap to BWP 1.93bn from BWP 1.94bn at 31 December 2019. This was on the back of G4S losing 2.86% to BWP 3.40 vs. BWP 3.50 at the beginning of the year. This sector accounted for 0.42% and 1.68% of volumes and value transacted on the bourse with 1.7m shares worth BWP5.3m changing hands. G4S was one of the least liquid counters, with only 36,965 shares worth BWP 127,296 ytd.
Navigating Through Volatility
Africa Capital Markets News| Page 12
The UNCTAD World Investment Report 2020 indicates that COVID-19 crisis will cause a dramatic fall in foreign direct Investment (FDI). Global FDI flows are forecasted to decrease by up to 40 per cent in 2020, from their 2019 value of $1.54 trillion. This would bring FDI below $1 trillion for the first time since 2005. FDI is projected to decrease by a further 5 to 10 per cent in 2021 and to initiate a recovery in 2022. A rebound in 2022, with FDI reverting to the pre-pandemic underlying trend, is possible, but only at the upper bound of expectations.
$1 TRILLION
FDI LOSS 40% FDI Loss projected in 2020. With further 5-10% in 2021.
The rise of national protectionism in the wake of COVID-19 will steer domestic mobilization of resources for local impact investments. As a result, stock exchanges provide a platform for sustainable finance and guidance for corporate governance for investors and SMMEs wishing to raise capital. As we enter H2 2020 more companies will be restructuring and looking for ways to raise more capital. We expect the low volume of IPOs on the local bourse to change as more companies look within the domestic financial ecosystem to raise more funds.
Agri-Business News
Heavy rains at the end of 2019 and the beginning of 2020 raised high expectations for smallholder farmers that a new dawn had arrived and that a new lease of life had been granted to the ailing agriculture sector which had been subjected to prolonged droughts and low rainfall in previous months. Locust invasion and COVID-19 had different plans, ending up being the ultimate spoilers for the sector and dashing the hopes of many farmers who were hoping to make a handsome reward over the harvesting season. In addition, the harvesting season coincided with the lockdown period leaving many farmers with the painful reality of loss making as consumers were on lockdown with restricted movement. But not all was lost as a few savvy farmers resorted to digitalization and ecommerce to take their produce from the farm to the door steps of consumers to recoup their investment. With the import food bill at a skyrocketing P4 Billion, COVID-19 exposed the urgency of developing a robust local food security strategy that will not only feed the nation but ensure sustainable supply of food to hedge against future uncertainties or crisis.
The Food Security Imperative| Page 13
The rigorous COVID-19 pre-screening checks at border posts for truck drivers bringing in goods will also cause delays for goods to reach their final destination. According to Statistics Botswana International Merchandise Trade March 2020 report, imports valued P3, 615.5 million, representing 57.3 percent of total imports reached the country by road. Food, Beverages & Tobacco and Machinery & Electrical Equipment contributed 13.7 percent at P862.8 million out of P6,311.4 million total imports for that period. Total Import by Mode of Transport March 2020 (Million Pula) 4,000 2,000 1,000 0 Rail
Road L Imports
Source: LCM Capital, Statistics Botswana
Air
Other
Agri-Business News
The Food Security Imperative| Page 14
49% 51% OF MALE
OF FEMALE
Only 1.9% (9,113) of the working population is employed by the Agriculture, Forestry and Fishing Sector in Q4 of 2019. Will the empty shelves at retail grocery stores during consumer panic buying be the accelerator postCOVID 19 to finally give agriculture and food security the utmost priority it so deserves? Opportunities in the food industry and its value chains have never been amplified with everyone young and old identifying gaps and looking for ways to close these gaps. As youth unemployment rate among the 18-35 age group continues to spike at 28.8% and the biggest employer the public sector goes on a recruitment diet to survive the COVID-19 impact, solutions for job creation primarily for the youth lies within the agriculture sector. Statistics Botswana latest report shows that only 9,113 people are employed in the agriculture, forestry and fishing sector representing 1.9% of the total working population. Historically, the youth had shied away from the sector due to inherent risks such as poor climatic conditions, access to irrigated land and high cost of capital associated with it. However, the adoption of climate smart agriculture techniques has proven to yield attractive return on investment and the changing face of farmers over the past 5 years is gradually recruiting idle educated youthful graduates to consider agriculture as an avenue to make decent living and break the chains of poverty. As borders remain closed for the unforeseeable future, the economic drive to nurture the local horticulture industry will bear fruits in the short to medium term.
The African Development Bank estimated that the agriculture industry in Africa will be valued at $1 trillion by 2030. In order for this prediction to come to fruition, an energized local food security drive will have to be impeccably and passionately executed and implemented which will not only generate the thousands of youth jobs but also shrink the food import bill and enable Africa to feed herself.
"Opportunities in the food industry and its value chains have never been amplified with everyone young and old identifying gaps"
Agri-Business News
The Food Security Imperative| Page 15
SeedCo FY 2020
65-75% in PBT The only listed agri-business on the BSEL expects FY 2020 PBT to be 65-75% higher than prior year's US$5.2M due to favourable currency movements on net denominated receivable.
" "The success of agroprocessing ventures is positively correlated to the proximity to the feed of the processing plants. Therefore, more farmers are needed to grow feed to reduce import feed cost by up to 90% "
- Lindiwe Mafavuneh LCM Capital-Founder & CEO
Eco-Tourism Drive
Tourism Sector to Gain from Staycations| Page 16
Tourism & Hospitality Sector tourism & hospitality sector is 35-50% The expected to contract by 35%-50% given the sectors heavy reliance on high-value international tourists .
Since the beginning of the year the Pula (BWP) currency has appreciated by 14.35% against the South African Rand (ZAR) which would have enticed local travelers to cross the border to receive good value for money at South Africa's exotic resorts . However, the closing of border posts presents a catch 22 for travelers as they will have to undergo the imposed two weeks quarantine for re-entry. The new normal present opportunity for the struggling local hospitality and tourism sector which is under dire strain due to travel restriction of its high net worth clients. According to the latest report by Imara Capital Securities on COVID-19 impact, the tourism & hospitality sector market cap was down by 0.57% ytd at BWP 1.23bn vs. BWP 1.24bn at the beginning of the year. This was on the back of price losses in Chobe eclipsing Cresta’s 0.75% price gain to BWP 1.35.
Chobe depreciated by 0.90% to BWP 11.00 vs. BWP 11.10 at the beginning of the year. The disruption caused by the health crisis to the tourism & hospitality sector has resulted in little to no business for this sector as containment measures remain in place the world over. Chobe’s future outlook was already under pressure as the company had to deal with the impact of uncertainty surrounding Brexit on incoming tourists and potential ramifications of the US-China trade war on foreign currency translation. Travel restrictions imposed by the virus resulted in cancellations of bookings across the industry and as such little to no revenue generation during what should be Chobe’s peak season. The tourism & hospitality sector is expected to contract by 35%-50% given the sectors heavy reliance on high-value international tourists visiting the safari areas and game parks.
Eco-Tourism Drive
Tourism Sector to Gain from Staycations| Page 17
Both Chobe and Cresta are expected to report
High end travel resorts will have to restructure their
significantly lower profits in the coming reporting
pricing in the short-term to accommodate their less
season. To cushion against COVID-19 impact
affluent clientele as the borders remain closed for
Cresta has withheld paying dividends to
an indefinite period and also to offset losses incurred
shareholders and also suspended all major capital
during the period. Not all is lost for those with the
expenditure projects for the year and withheld a
travel bug as they will have the opportunity to
dividend in order to preserve its cash resources.
explore Botswana and other unexplored sites.
Real Estate News
On the north side of the city of Gaborone in Tsholofelo West lies a newly developed residential estate nestled between a private school and residential houses. The residential estate consists of a row of aesthetically pleasing modern apartment blocks, ideally suited for young professionals and first time home buyers. This project was completed under the stewardship of the Botswana Housing Corporation, whose mandate is to provide affordable housing to the Citizens of Botswana. The development consists of 750 units of which one third of the units, that is a total of 250 out of 750 units, is reserved for the youth. This new establishment is yet to have occupants living there and has turned into a ghost town while on the opposite side there is more construction of more apartments being built, contradicting the status quo of zero occupancy. One may argue that the sprouting of more units is a sheer vote of confidence from the developers that they will get business from the targeted customers. Too much confidence may also be clouding the judgement of the developers to be able to recognize a deeper underlying reason. to why the units are not selling as fast as fat cakes. The deep rooted issue is the relationship between employability and access to land and property.
Youth Employment & Affordable Housing| Page 18
Unlike the retired baby boomers in Botswana who had access to land and employment with just a high school certificate, the late Millennials and Generation Z are not that blessed. This is the rent with your parents until you are in your thirties generation due to the double digit unemployment rate. Even if you have a job, some choose to live with their parents to save up money to put down to access their first home. The housing prices are also way too high for these young people to climb up the property ladder. According to the latest statistics, the estimated population of youth for the 15–35 years age bracket is 856,131, with youth labour force representing only 55% of the youth at 474,193. This means that there is close to 50% opportunity lost on idle youth in the economy, hence why new business across various industries continue to grow at a snail pace of less than 10%.
P5,325P14,000 Salary Range
TPS & OPS SCHEME The sales models came through; outright sale, Tenant Purchase Scheme (TPS) and Step Ownership Scheme (SOS) target at for all Batswana aged between 18 and 65 years
Real Estate News
Youth Employment & Affordable Housing| Page 19
The TPS and OPS scheme is not exclusive to the youth populace but also target the low income bracket group from 18-65 years old. The prerequisite salary range of P5,325-P14,000 seems miniscule to those on the tier 1 earning bracket, but it is still above the average salary of the targeted groups. COVID-19 headwinds will also exert pressure on rentals after salary cuts were incurred during lockdown periods. According to Imara Securities COVID-19 report, government interventions which have restricted, and in some cases, prevented tenants’ abilities to trade, therefore some salary cuts, some tenants have struggled to cover their rent obligations. They mentioned that negotiations and discounts will be given to those adversely affected by the necessary Government interventions and measures implemented in efforts to contain the spread of the virus. At the backdrop of this, rental yields are expected to be lower than future cash flow which will invariably have a negative impact on property valuations, thus affecting listed property equities.
Real Estate News
Despite COVID-19 pressures, the property sector’s market cap grew marginally by 0.03% to BWP 6.8m. The growth in the sector was on the back of share price appreciation from Letlole (+4.44%), NAP (+0.31%) and RDCP (+0.25%). On the other hand, FPC, Turnstar and PrimeTime depreciated by 2.44%, 0.36% and 0.34% respectively.
Youth Employment & Affordable Housing| Page 20
5%
+4.44%
1%
+0.31%
Letlole
NAP
The biggest winner in H1 that pushed the property sector growth.
Slight increase from another property listed equity.
1%
+0.25%
RDCP Another slight increase from another property listed equity.
Portfolio Management
The economic outlook of the local economy growth looks bleak in the short to medium term with IMF forecast of a 5.4% contraction this year before rebounding to 6.8% in 2021 and the Ministry of Finance estimating a even worse contraction of 13.1% and a rebound of 3.9% in 2021. This bleak outlook is giving fund managers sleepless nights as they look high and low for alpha during the economic recovery phase. Could this be a new dawn for alternative investments in the chase for attractive alpha during unprecedented COVID-19 times? The Southern African Venture Capital Association (SAVCA) recently released a position paper in which they propose an amendment to Regulation 28 of the Pension Funds Act which impose restrictions on the allocation of alternative investments by grouping private equity with hedge funds and “other� despite significant differences in the risk/return profiles of these asset classes. SAVCA suggest the constraints limit the economic impact that private equity and venture capital can have at the same time as limiting the ability of fund managers to fully deliver on their mandates.
Chasing Alpha During Economic Recovery| Page 21
They proposed two changes to Regulation 28; separate hedge funds and private equity into independent asset classes, each with their own caps. to increase private equity ceiling from 10% of assets to 15%. As stock markets continue to see red during COVID-19 crisis, private equity and venture capital funds will play a crucial role in rebuilding the economy by stimulating growth of SMMEs, spur innovation growth through investments which will invariably lead to economic sustainability. Including private equity in a portfolio, pension funds can diversify overall risk by gaining exposure to different economic sectors and different development stages of companies, so reducing the correlation between assets in their portfolios but obtaining access to higher real returns. Diversification of investment asset classes in developing economies such as Botswana will accelerate the development of the capital market infrastructure and boost financial inclusion.
Chasing Alpha During Economic Recovery | Page 22
Portfolio Management
Private Equity Investments By Stage, 2018
19.5% 23.0%
45.2%
8.6% 3.7%
Expansion & Dev Start-Up & Early Stage
45.2%
Buyout 8.6%
Unclassified
The sole objective of private equity and venture capital is to develop new companies and growing established ones. SAVCA reported that in 2018, the industry made R35.4bn of new investments, including R20.5bn in follow-on investments to support growth and R14.9bn of new investments (Southern African Venture Capital and Private Equity Association, 2019). According to the report, this was the highest investment level on record, even though the economy had experienced several years of negative per capita growth as shown on the figure 1 chart above. A portfolio management research paper by Xiaohui Yang and Hossein B. Kazemi on holdings concentration and hedge funds strategies discovered the risk–return performance of concentrated positions of hedge funds in large-cap and small-cap stocks. The research shows that smallcap stocks in which hedge funds have concentrated positions earn higher future returns than those that are not part of hedge funds’ concentrated holdings. Also, stocks that are part of the concentrated positions of hedge funds display higher downside risks and relatively large downside returns during periods of market turmoil.
19.5%
Replacement 3.7%
23.0%
Figure 1: Source: SAVCA
The results presented indicate that hedge fund managers are skilled in making equity investments under different degrees of market efficiency. The authors’ findings have two practical implications: hedge funds that hold concentrated positions in small-cap stocks may outperform their peers and; investors may be able to improve the performance of their equity portfolios by monitoring hedge funds’ positions in smallcap stocks. Hedge funds are among the most important players in equity markets. as hedge fund managers exhibit skills in portfolio construction but, more important, they spend enormous resources on researching companies overlooked by others, such as small-cap stocks. It has been reported that 80% of Wall Street research is focused on the 20% of publicly traded companies with a market capitalization greater than $1.5 billion, leaving a large number of small companies with scant analyst coverage.
Portfolio Management
les u R nt e tm s t e x v f te nd In 5% o 1 y u d bo R2 F t r o a PF h ts: s n 5% d n e m Ad tswa t 5% ves n Bo I e 5% tiv a n er s ty i d Alt u n q Fu te E e g a d He al Priv quity E Loc shore Off
Chasing Alpha During Economic Recovery | Page 23
Unlike Regulation 28 of South Africa's Pension Funds, Botswana's Pension Prudent Fund Rules (PFR2) in terms of Section 4(d) of the NBFIRA Act, 2016, asset allocation limit for alternative investments is 15%, segregating the asset class into three buckets; hedge funds and local & offshore private equity. Due to the real economic impact nature of private equity, perhaps a review of the allocation of local private equity limit should be considered as to boost economic growth during COVID-19 economic recovery stage.
Creating An Enabling Environment During Recovery
As alluded in our previous issues on regulation and policy, the role of the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) is to offer oversight guidance to its portfolio across a diverse pool of industries including Insurance, Pension, Capital Markets, Non-Bank Lenders, Collective Investment Undertakings (CIUs), Asset Managers, Investment Advisors, and Custodians. As stated on their website, the primary responsibilities include safety and soundness of non-bank financial institutions, highest standard of conduct of business by non-bank financial institutions, fairness, efficiency and orderliness of the non-bank financial sector, stability of the financial sector and reduction and deterrence of financial crime. The role of the regulator as the custodian of good corporate governance has never been emphasized especially in the asset management industry that is rebuilding public trust after being engulfed in a few corporate governance lapses that resulted in a million pula loss in the value of pensioners funds. Moreover, the international community is demanding compliance of financial institutions to adhere to best practice and international standards, which has exerted pressure on the regulator to crack the whip on its portfolio companies to adhere to the stringent rules in order to gain confidence in the international markets and return Botswana to the green book of countries doing the right things.
Regulation & Policy | Page 24
Taking all that has transpired at the beginning of 2020 and the blacklist status, the regulator is in a precarious position to reverse the reputational damage of non-compliance and to work with other regulatory bodies to close the deficiencies that were identified. The duration of when that will be rectified is still unknown and with uncertainty hoovering through the anti-money laundering and countering financing of terrorism and proliferation (AML/CFTP) issues, some offshore fund managers will cancel their mandates with local institutional investors in Botswana. With the probability of the funds returning onshore highly likely in the short to medium term, the regulator's efforts should be directed towards creating an enabling environment for onshore fund managers to thrive in the new normal. There should be a fine line in the balance of regulation and efficiency in doing business. Regulation under these special circumstances should serve as a facilitator for companies to continue their operations and not a hindrance. As stated in the capital markets article NBFI sector continues to outperform its industry peers. In 2018 the NBFI sector registered a 4% increase in assets from P117 billion in the prior year to P121 billion accounting for 55% of the domestic financial market share.
Regulation & Policy | Page 25
Creating An Enabling Environment During Recovery
Retirement Funds 85
Capital Markets 84
747 Insurance 236
Non-Bank Lenders 342
The NBFI sector recorded a 3.6% decline in the number of the licensed entities from 775 in March 2018 to 747 in March 2019.
P121 BILLION
Non-NBFI Sector market share of the nancial Services Sector
NBIF Sector Earned 6% growth in assets & has 55% market share of the domestic nancial services in 2018.
NBFI Sector market share of the nancial Services Sector
45
55
Creating An Enabling Environment During Recovery
Digitalizing Client Onboarding & KYC To reduce the rate of non-compliance regulators need to integrate paperless innovative solutions that will alleviate the pain points of the KYC process, directly minimizing AML/CFTP risks. According to Refinitiv governance risk and compliance solutions article on digital ID in Africa: Leading the fraud fight, the use of digital ID in Africa is gaining momentum in the fight against financial crime, fraud and money laundering. According to the article the use of digital ID in Africa not only helps the fight against financial crime and fraud, it can improve financial inclusion and boost e-commerce. Qual-ID is an efficient and accurate way to digitally onboard consumers through a combination of Refinitiv’s World-Check Risk Intelligence and Trulioo’s digital identity network.
Regulation & Policy | Page 26
Botswana Innovation HUB-COVID 19 Challenge
Emerging Innovative Companies in COVID-19 | Page 27
Botswana Innovation Hub which is an organisation espoused to promote technology, entrepreneurship and commercialisation recently announced top 5 COVID-19 challenge Innovation Fund recipients creating solutions to mitigate risks posed by COVID-19; Creative Insights, First Aid Counselling, Spectrum Analytics, Corugated Minds and Doctors E-Consult, whose profiles are listed below.
Botswana Innovation HUB-COVID 19 Challenge
Emerging Innovative Companies in COVID-19 | Page 28
Botswana Innovation HUB-COVID 19 Challenge
Emerging Innovative Companies in COVID-19 | Page 29
Beyond Markets
ESG Insights| Page 30
Taking Up the Challenge of Turbulent Markets with ESG and Multi-Assets After a long bull market, the COVID-19 pandemic has shaken the financial markets and put the question of how to earn a smooth return stream over a long period of time back on the table. This has given rise to a strengthening of conviction toward environmental, social, and governance (ESG) investing and risk management. S&P Dow Jones Indices recently launched the S&P ESG Global Macro Index, which is designed to deliver stable returns through various market conditions and to align investments with ESG values. The index exploits dynamic allocation between regional diversified bonds and ESG-themed equities based on economic and market trend signals and aims for a stable risk level by adjusting allocation between the portfolio and cash on a daily basis. Over nearly the past 10 years, the index delivered an annualized return of 5.43%, volatility of 4.87%, a Sharpe ratio of 1.12, and a maximum drawdown of 6.35%. During the COVID-19 sell-off, the S&P 500ÂŽ ER[1] fell 34.09% from Feb. 19, 2020, to March 23, 2020, while the S&P ESG Global Macro Index returned -4.44%.
Two key aspects of the index design are; 1) ESG value alignment and, 2) diversification through dynamic asset allocation. Both aim to mitigate the negative impact on index return during market turbulence.
S&P ESG Global 10 Years Performance Return 5.43%
Volatility 4.87%
5%
5%
Sharpe Ratio 1.12
Drawdown 6.35%
1
6%
ESG Value Alignment The equity basket of the S&P ESG Global Macro Index consists of the S&P 500 ESG Index, S&P Europe 350 ESG Index, and S&P Japan 500 ESG Index. Theses indices are composed of companies with the top 75% S&P DJI ESG Scores within each industry group, while excluding companies involved with tobacco or controversial weapons, or with low United Nations Global Compact scores. These indices provide meaningful ESG performance improvement with little tracking error against the non-ESG benchmarks. During the COVID-19 sell-off, [2] the S&P 500 ESG Index and S&P Europe 350 ESG Index outperformed their benchmarks by 0.69% and 0.24%, respectively, while the S&P Japan 500 ESG Index slightly underperformed its benchmark by 0.23%.
Beyond Markets
ESG Insights| Page 31
Dynamic Allocation The dynamic allocation mechanism used in the S&P ESG Global Macro Index has historically been effective at reducing risk and improving risk-adjusted return. To demonstrate this, we constructed a hypothetical multi-asset portfolio that mimics the exact setting of the S&P ESG Global Macro Index, except that the allocation to equity and bond baskets are at constant 60% and 40%, rather than dynamically determined by macroeconomic and market trend signals. Over nearly the past 10 years, the S&P ESG Global Macro Index provided a meaningfully higher absolute return and Sharpe ratio than the hypothetical portfolio, with the same level of volatility and slightly lower maximum drawdown (see Exhibit 2).
Scenario A: The Bear Market from Feb 19, 2020, to March 23, 2020 During the COVID-19 sell-off, the S&P ESG Global Macro Index shielded investors from large losses through its dynamic asset allocation and risk control overlay.
From Feb. 19, 2020, to March 10, 2020, the equity market tumbled, while bond prices increased. The index began this period with a 60% allocation to equities, and it switched entirely to bonds at the beginning of March. The negative correlation between equities and bonds helped to defend the portfolio levels from Feb. 19, 2020, to Feb. 28, 2020. From March 11, 2020, to April 8, 2020, the oil price crash further triggered the market selloff, in both the equities and bond markets. The daily risk control mechanism began to reduce exposure to bonds, which helped to reduce losses.
Beyond Markets
Scenario B: The Bull Markets in 2017 and 2019 In bull markets like those in 2017 and 2019, the S&P ESG Global Macro Index underperformed the S&P 500 ER. This comes as no surprise for a multi-asset index with a prudent volatility target. However, the index still delivered returns of 11.1% and 12.3% in 2017 and 2019, respectively, and with a higher Sharpe ratio than the S&P 500 ER in 2019.
The S&P ESG Global Macro Index aims to balance returns and risk in different market conditions. Historically, it has mitigated large losses from equities during bear markets while still delivering comparable Sharpe ratios during bull markets. [1] The two-month U.S. dollar LIBOR interest rate and three-month U.S. dollar LIBOR interest rate are used to calculate the S&P 500 ER. [2] The COVID-19 sell-off refers to the period from Feb. 19, 2020, to March 23, 2020, in the U.S. market; Feb. 19, 2020, to March 18, 2020, in the European market; and Feb 20, 2020, to March 16, 2020, in the Japanese market. [3] The hypothetical portfolio allocates 60% to the equity basket (S&P 500 ESG Index, at 30%; S&P Europe 350 ESG Index, at 20%; and S&P Japan 500 ESG, at 10%) and 40% to the bond basket (S&P 10Year U.S. Treasury Note Futures Index, at 20%; S&P Euro-Bund Futures Index, at 13.33%; and S&P 10-Year JGB Futures Index, at 6.67%), and it is rebalanced monthly. A 5% daily risk control overlay is applied. Article Credit: Claire Yi-Analyst, Strategy Indices at S&P Dow Jones Indices (S&P DJI)
ESG Insights| Page 32
COVID-19 & Climate Change Parallels
Climate Action | Page 33
By Kudzani B. Koketso
A
lbeit having different causes, what do the COVID-19 virus and climate change have in common? They are both global-to-local public health disasters with vast reaching existential risks and impacts. I vividly remember mindlessly stepping outside the door one random summer day in late 2018. In less than a minute, I scrambled back indoors. I wish I had enough words to describe the consequent sensation of the hot slap (pun intended) on my skin from the heatwave Botswana was experiencing- “melting”, maybe.
I hate to imagine myself referring to that a couple of years from now as a “new normal”. However, if there is anything that the effects of the COVID-19 pandemic are teaching me, it is the threats that loom to what we often hold on to as ‘normal’. Within the space of a few months, the world has been thrust into a global disorder of epic proportions, and this has frequently got me thinking: are the devastating socio-economic effects of the COVID-19 pandemic just but a glimpse into the impacts that frequent global natural disasters, caused by climate change, will have on economies and societies if we maintain a business-as-usual approach?
COVID-19 & Climate Change Parallels
Climate Action | Page 34
Humanity is bound to realize the vast reaching existential risks of lackadaisical climate action, given the integrated nature of the sectors that drive our existence on planet Earth
Kudzani Koketso
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COVID-19 & Climate Change Parallels
I am confident that, given numerous scientific predictions currently at play, including the scientific summary for policymakers of the Intergovernmental Panel on Climate Change (IPCC) , humanity is bound to realise the vast reaching existential risks of lackadaisical climate action, given the integrated nature of the sectors that drive our existence on planet Earth. Global warming caused by increased industrialisation using non-renewable forms of energy, amongst other things, is increasing the temperatures of the Earth’s atmosphere and oceans. Some of the disasters wrought by this phenomenon include droughts, tsunamis and floods, to name a few. In his annual address to the nation in 2019, the President of the Republic of Botswana, His Excellency MEK Masisi, revealed that Government had decided to classify drought as a permanent budgetary feature, and no longer an emergency. I believe this is an indication of the ‘normal’ we can expect going forward, not only in Botswana, but globally as well.
Climate Action | Page 35
He further noted several consequent concerns, including increased human-wildlife conflicts (due to altered migration patterns) as well as threats to food security which have mandated the introduction of relief subsidies in the agricultural sector. Globally, the similarities of climate change-induced activities are glaring! As Earth’s temperatures rise and sea levels follow suit, we will experience more natural disasters. These examples point to occurrences that have the potential to decimate economies and societies; most importantly, they add to an already overstated case: the need for URGENT action to mitigate the current impacts of human activity on the environment. The COVID-19 pandemic has brutally demonstrated its socio-economic domino effect and has left nations bleak about whether post-pandemic recovery will be adequate to restore nations back to themselves. Disasters caused by climate change are, and will be, no different.
COVID-19 & Climate Change Parallels
Climate Action | Page 36
Nevertheless, if there is one inspirational thing this moment in history is teaching me, that is COVID-19, it is the heightened human consciousness to the impacts of our daily actions on one another’s livelihoods. People have, for the most part, mobilised to keep each other alive! If ever I have had faith in humanity’s willingness to act for a greater good, it is now. The same collective and collaborative spirit can be employed for looming crises, including human-induced climate change. Lest we forget and get comfortable once we have emerged from this season: the time to act is NOW. There is no time more suitable than the present to mobilise and secure our livelihoods, and those of our children. In the insightful words of John Kerry (former US Secretary of State), “this moment in life is inseparable from this moment on Earth”. Together we can!
The Way Forward
After three months of washing our hands like we are about to perform surgery, sanitizing, staying home and wearing masks to flatten the curve, most African economies are now graduating from the response phase to the economic recovery phase of the COVID-19 effects. Lockdown periods have left a trail of economic distraction that will require billions of dollars to rebuild economies especially those in the SSA region whose life line is dependent on exporting goods and services to developed countries. Nationalization is the new world order as borders remain closed for the unforeseeable future and economic restructuring is a necessity to revitalize ailing economies. The flip side of the COVID-19 disruption lies a plethora of opportunities that will be uncovered by those who are not phased by difficulties. This is the optimal time for most African countries to reset their economies and wean themselves from imports of good and services they can produce locally, thus establishing robust sustainable industries in manufacturing, food and agroprocessing and telecommunication sectors. AVCA latest report on Venture Capital in Africa: Mapping Africa’s start-up investment landscape report indicate that Africa based Investors participated in only 20% of the total 613 VC deals between 2014-2019 valued at US$3.9 Billion. On the other hand, North America Investors participated in 42% of the total VC deals followed by European investors at 23% and Asia-Pacific and Middle East at 8% and 6% respectively. This means there are plenty of early stage and startup deals in Africa that are overlooked by African Investors due to their risk aversion to new ideas. Since the SMME sector represent 90% of the businesses in Africa, concerted effort should be made to nurture and grow businesses from idea stage in order to boost innovation in the African entrepreneurial ecosystem. Economic recovery in the next 5 years will be determined by how conducive the business environment is towards the bedrock of job creation, SMMEs, in the postCOVID era.
Outlook | Page 37
Africa Investors in VC Add short body ofParticipation text
20%
Africa based investors represent a small fraction of investors attracted to new opportunities and new markets in Africa between 2014-2019. COVID-19 calls for more participation from Africa based investors during the economic recovery phase.