East African equity markets have been on fire this year. Debt market returns have also been strong, but they have certainly played second fiddle to equities, with all three markets (Tanzania, Uganda and Kenya) up more than 40% in local currency terms year to date. We headed off to assess whether there is still further upside, or whether it is time to start looking for new opportunities elsewhere.

We have visited Kenya and Uganda regularly over the years, but it had been at least a decade since my last visit to Tanzania. In the spirit of spreading some Swahili love, we managed a full house of East African airlines during the trip; flying with Air Tanzania, Kenya Airways, and Uganda Airlines. Credit where it is due: all flights were comfortable and on time.

Tanzania: Infrastructure and investor enthusiasm

We started in Dar es Salaam, which translates from Arabic as House of Peace. The name Tanzania dates to 1964 and combines the names of Zanzibar and the mainland territory of Tanganyika.

The two major talking points in Tanzania were the noticeable reduction in traffic congestion and the launch of East Africa's first exchange-traded fund (ETF). Since my last visit, significant infrastructure development, combined with the relocation of nearly one million civil servants and their families to the new capital city of Dodoma, has materially reduced congestion in Dar es Salaam. Dodoma is approximately four hours away by train and has become an increasingly important administrative hub.

From a macroeconomic perspective, Tanzania appears to be the best positioned of the East African economies, with manageable fiscal and current account deficits. The country is also a significant gold producer, which has helped improve foreign exchange reserves and external balances.

The stock market's strong performance appears to have been largely driven by local investors. The financial market participants we met highlighted two key developments: the launch of the iTrust EAC Large Cap ETF in January 2026 and the introduction of a new mobile trading platform that allows retail investors to invest directly in the Dar es Salaam Stock Exchange. Together, these initiatives have sparked considerable enthusiasm among local investors. As a perennial cynic, I do worry when many investors have only ever experienced gains. What happens when things turn down? One of the large banks, CRDB, mentioned that its shareholder base has expanded from 30 000 to 100 000 in the last few years. Access to the stock exchange has led to an explosion in retail investors.

Uganda: Waiting for the oil

Uganda was almost entirely about one question: when will the first oil flow?

The capital city, Kampala, derives its name from the impala antelope that once roamed its hills. Kampala is approximately an hour's drive from Entebbe International Airport (of the 1976 Air France hostage drama) and sits on the northern shores of Lake Victoria, Africa's largest lake. Lake Victoria is also the source of the White Nile River, which eventually joins Ethiopia's Blue Nile in Sudan, before continuing its journey through Egypt.

Uganda's oil story has been more than two decades in the making following major discoveries near Lake Albert in 2006. It represents one of the largest undeveloped oil projects globally and expected to become the next major oil success story following Guyana, which began production in 2019. Namibia, meanwhile, is hoping to be next in line.

Several factors have delayed Uganda's oil production:

• Tax disputes between the government and the oil companies.
• Changes in project ownership.
• Debate over whether exports should be routed through Tanzania or Kenya. Eventually Tanzania was chosen, as it offered 'free' passage, while Kenya is said to have wanted US$5 per barrel.
• The actual construction of the 1 400km East African Crude Oil Pipeline to Tanzania.

The pipeline is now reportedly around 91% complete, and optimism across the country is evident. Oil production has the potential to be transformational for Uganda's economy.

The country has been pushing its macroeconomic limits in anticipation of future oil revenues. The fiscal deficit remains elevated, boosted further by spending ahead of its February 2026 elections, while the current account deficit is also sizeable. Oil exports are expected to provide a much-needed boost to government revenues and help narrow the trade deficit.

There are relatively few opportunities on the Uganda Securities Exchange. Our only equity exposure is a 1.5% position in the telco MTN Uganda. However, we maintain meaningful exposure to Uganda's fixed income market, where longer-dated government bonds offer yields of approximately 15% in Uganda shilling.

It is an exciting period for Uganda, although my engineering colleague remains somewhat sceptical (one team, two sceptics) about the project. The challenge is that the 1 400km pipeline must continuously heat the crude oil to keep it in liquid form. If the oil cools, it solidifies into a waxy substance resembling candle wax or shoe polish. Transporting a liquid through a pipeline is one thing; transporting shoe polish is quite another.

Kenya: Strong equities, challenging macro

Of the East African markets, Kenya presents the greatest macroeconomic concern.

Government borrowing has increased substantially over recent years. While the fiscal deficit improved from around 8% of GDP during the Covid period to approximately 6% currently, there is a risk that it widens again as the country approaches the 2027 presidential elections. Higher oil prices could also place pressure on the current account deficit, which already sits at roughly 6% of GDP.

Under normal circumstances, such conditions would likely result in some currency weakness. However, the Central Bank of Kenya has managed the foreign exchange market effectively over the last two years and has rebuilt reserves, providing it with some capacity to support currency stability if required. Reserves have increased from US$11bn to US$18bn.

Within the equity portfolios, we remain overweight Safaricom and Kenya's two largest banks, Equity Group and KCB Group.

We are comfortable maintaining this positioning in the banking sector, as net interest margins have room to expand while non-performing loans continue to improve from previously elevated levels. Safaricom could also benefit from near-term excitement surrounding the anticipated listing of Airtel Money, Africa's mobile money business, in the coming weeks. Safaricom is one of the world's leading mobile money operators, with approximately 40% of revenue generated by M-Pesa. The Airtel Money listing should provide investors with a useful benchmark for valuing stand-alone mobile money businesses.

In addition, Safaricom's earnings outlook continues to improve as losses from its Ethiopian operations reduce over time, with profitability now moving closer into view.

While we remain constructive on Kenyan equities, we are more cautious on Kenyan debt.

Divergence is opportunity

Performance across African equity markets has been highly uneven this year. While many markets, including the three we visited, have generated exceptional returns, the continent's two largest markets outside South Africa, Egypt and Morocco, have yet to participate meaningfully in the rally. South Africa, which falls outside our mandates, has also delivered a more subdued performance.

This divergence is positive from a fund management perspective. When markets move in very different directions, opportunities remain plentiful. Highly synchronised markets tend to make investment decisions more difficult, as valuation gaps and country-specific opportunities become scarcer.

For the Old Mutual African Frontiers Fund, we continue to find attractive opportunities across selected equity markets. For the Old Mutual African Flexible Income Fund, local currency debt remains particularly compelling, alongside potential opportunities arising from Senegal's debt restructuring process.