Beyond 2009: charting a recovery path for African bond and currency markets

While Peter Eerdmans, head of the Emerging Market Debt team at Investec Asset Management, says his team has avoided Africa’s frontier bond and currency markets over the past 18 months, valuations are now starting to appear attractive. In addition, they believe African economies are set to benefit from the strong and growing links between Africa and China, coupled with continuing local reform momentum.

African currencies and bonds, along with their emerging market peers, witnessed a dramatic sell-off in the fourth quarter of 2008. While the more liquid emerging bond and currency markets have since posted strong recoveries, African bond yields have not only remained less compressed than those seen in other emerging markets, but currencies have also lagged.
Indeed, many remain weaker than their pre-credit crunch levels. Compared with the broad index of emerging market currencies, which has rallied more than 18% since early March, some African currencies have fallen behind significantly in nominal terms – the Nigerian naira (-4%), Angolan kwanza (-3%) and Egyptian pound (+1%) are just some examples.

Over the last 18 months, African bond and currencies have not shown sufficient value relative to their more liquid and lower-risk peers – but we are now seeing a shift. Having been hit hard by risk aversion, we believe African currencies in general are now undervalued, particularly relative to their more advanced emerging market peers.

African capital markets are relatively small and largely the domain of more specialised global investors. Access often requires local knowledge and contacts. This is one of the reasons why portfolio flows to these frontier markets typically recover with a lag compared to the more advanced emerging markets.

With valuations now appearing increasingly attractive and risk appetite returning across a wide universe of African bond and currency markets, we believe that a number of factors support a compelling case for the continent’s positive long-term prospects.

A central feature of the global economic recovery has seen emerging markets placed for improvement in a much stronger position overall than developed economies; whilst the IMF predicts that whilst the GDP of the world’s most advanced economies is expected to fall by -3.8% this year, the output of emerging markets is forecast to grow by 1.5%; one of the key drivers of economic recovery being growth driven by the resource-dependent economies of China and India which in turn bodes well for African resource-rich nations.

The strong and growing links between Africa and China, coupled with continuing local reform momentum, enforces our positive view of the prospects for African economies. China’s large-scale diplomatic drive to strengthen Sino-African co-operation in the areas of energy, infrastructure and health was underlined by President Hu Jintao’s tour of Africa earlier this year. While China’s interests are dominated by securing access to commodities, this diplomatic campaign indicated an interest extending beyond traditional trade co-operation, and saw the announcement of far-reaching plans including bilateral assistance in the form of infrastructure financing, aid, debt cancellation agreements and trade concessions. For now, we believe these factors are a positive driver for the African continent, encouraging further integration and growth in Sino-African trade.

Thanks to improvements in the political backdrop of many African countries over the past decade, encouraging signs that corruption is declining and wealth is being distributed among a new and growing African middle-class should ensure that these efforts are now able to have a much more direct impact than may previously have been the case.

We are particularly bullish on the economic recovery of the key commodity exporters, such as Nigeria, Angola, Ghana, Uganda, Zambia, Botswana and Namibia. Due to the cyclical nature of their exports, these countries suffered the most during the recession and we believe they will also benefit the most from a commodity-led recovery.