Risk appetite beckons opportunity for African debt

The search for yield is still very much alive, as evidenced by the record-breaking debut eurobond issuance of Kenya last week. Even amid some encouraging signs of healing in developed market economies, yields are still unattractive relative to that of emerging and frontier markets.

The prolonged supply of excess liquidity due to accommodative monetary policy has pushed investors’ search for yield into riskier assets such as frontier markets. This appetite for risk will remain as long as investors are faced with disappointing yields in ‘safe haven’ assets.

It is, of course, rational and well-timed of African sovereigns to issue hard currency debt while they can obtain dollar funding at relatively low levels. This funding can serve these countries very well at this stage of their economic development, given the pressing need for infrastructure investment.

We, along with a growing base of international investors, believe that macroeconomic momentum on the continent remains broadly positive. Risks do remain and need to be closely monitored. However, it needs to be emphasised that – especially in the current environment – returns from eurobonds are generally driven by US monetary policies. This was evident last year as eurobonds performed poorly globally – Africa included – when US monetary policy started to signal the end of post-crisis ‘easy money’.

While we selectively invest in African eurobonds, we are even more focused on the local currency debt issued on the continent. This gives us more direct access to the economic developments of specific African countries. These developments – such as increased exports volumes, strong GDP growth – are largely independent from the rest of the global bond play.

Improving economic fundamentals, independent growth stories and increasing opportunities make African fixed income an exciting asset class. Sovereign dollar debt is an easy first step towards towards accessing the opportunity, but suffers from being highly dependent on non-African financial developments. Local currency opportunities require more intimate knowledge of these markets and we believe this insight will ultimately deliver good returns for investors.