Picking bond champions from Africa
Consider Egypt, Uganda, Nigeria, Kenya — but stay away from Ghana
FORGET about the usual suspects in the eurozone and Africa when looking for the best sovereign debt and fixed-income opportunities: the countries displaying tight fiscal discipline while offering attractive yields might surprise.
Antoon de Klerk, portfolio manager for the Investec Africa Fixed Income Opportunities fund, said that in terms of risk and return equations, Egypt looked attractive for shorterdated debt.
“I like Egyptian currency forwards and money market instruments. You’re being paid around 14% and it’s a managed currency.
“The risk is devaluation Asian-crisis-style, but we think the probability of that is low, as Egypt is the world’s biggest grain importer and the last thing the Egyptian government wants is food inflation, because that will put people on the streets again.”
De Klerk also likes Uganda, which may not be progressive in terms of human rights, but is making all the right budgetary noises.
“We’re being paid north of 10% in the money market and the central bank has a prudent . . . monetary policy — one of the most credible on the continent, if not in the world.
“They’re proactive in combating inflation, pro-market — they don’t intervene in the exchange rate — and they’re accumulating reserves and leaning against the wind.”
A slightly more obvious punt for De Klerk in terms of currency markets is Kenya, which “has a very bullish macro-story featuring growth and foreign investment”.
“Again, you’re being paid around 10% in the money market and there’s no interest rate risk. That’s exciting.
“A lot of global corporates are taking notice of the East African growth story — supportive environment, lots of human capital, diversified economy, access to 400 to 500 million people in the East African economic community.”
He said one of the attractions of an African fixed-income fund was that it was less integrated into the global financial system.
“In the emerging market universe, South Africa is one of the most integrated. We’re integrated into global financial flows, which is one of the big drivers of rand volatility. You don’t see that anywhere else in Africa except for Nigeria.”
In September 2012, Nigeria was included in a JP Morgan GBI-EM index — the second African country to be included in a global benchmark for developing market currency bonds after South Africa.
“It means you have a well-developed local bond market,” said De Klerk. “But it led to Nigerian bond yields collapsing from 15% to 12%. What that led to was quite a bit of foreign money entering the Nigerian bond market.”
The upshot was that Nigeria suffered alongside South Africa when the announcement of US central bank tapering led to a widespread withdrawal of investment positions in emerging markets.
“However, Nigeria, under the previous central bank governor, Lamido Sanusi, built up a lot of credibility. It really showed commitment to the nominal anchor in the economy — the exchange rate.
“There’s been a willingness to defend it, intervening in currency markets, spending foreign exchange reserves, of which they have substantial amounts — around $42-billion [about R450-billion].
“When the money came in, they didn’t allow the currency to appreciate. They accumulated foreign exchange reserves and are now only marginally weaker.”
A lot of global corporates are taking notice of East African growth
De Klerk said Nigeria had dealt well with the situation. “The naira is now paying almost 17% interest rates on a six- or nine-month basis.”
Last week, there was a brief panic sell-off in Nigeria when President Goodluck Jonathan suspended Sanusi. But his replacement, Godwin Emefiele, is seen as capable and conservative and the country’s markets stabilised.
South Africa has struggled with its own problems. Coronation Fund Managers portfolio manager Nishan Maharaj said many foreign investors’ South African sovereign debt positions had been left under water after the rand began to tumble last year.
“The dollar price of rand bonds is at its cheapest ever. Negativity has already been priced into the currency. We’re more optimistic about taking a position in rand bonds in 2014 be- cause the repricing reflects the country’s economic fundamentals.”
De Klerk said he chose local markets rather than the dollar bonds offered by African states.
“If you think in terms of risk — which in this case is volatility — and return, you’re getting paid 10% in yields for no duration risk on currencies that are not volatile. That’s a hell of a high hurdle for any dollar bond to beat. Only 25% of the portfolio sits in dollar bonds.”
He only buys dollar bonds where the local market is not attractive — “like West Africa, where inflation is low and they’re pegged to the euro and local yields are low, around 4%”.
“In context that’s unattractive, while dollar bonds can become attractive there. There are very good macro stories like Rwanda and the Ivory Coast at the moment — north of 7% or 8%. Tanzania is not as exciting but still offers opportunities.”
In terms of corporate bonds, De Klerk said that beyond South Africa, Nigerian banks and some Kenyan names there was little on the continent that was liquid enough for him to trade.
On the issue of credit quality, he said there was a reason he had not mentioned Ghana in the opportunities list. “Ghana has a huge growth rate, in the top 10 globally over five years, with a registered real GDP up to 9% and running inflation around 10%. With nominal GDP growth in the high teens, how do you get into trouble? Simply, they’ve been spending too much and are too highly leveraged. Ghana has a running fiscal deficit of 10% of GDP and that’s betting on continued real GDP growth in the high single digits. I just don’t think that’s sustainable. Ghana has to pay more . . . than any other African country to borrow in dollars,” said De Klerk.