For many people, investing in Africa outside of South Africa is still seen as something of a dark art. The risks are almost always the first consideration, and the returns have seemed highly irregular. A few years ago, African equity was seen as a real opportunity. As stock exchanges across the continent grew more liquid and provided access to a growing number of large companies on the continent, the ‘African growth story’ offered the potential of propelling returns. However, extreme volatility, patchy liquidity and the weakness in large economies like Nigeria have left investors disappointed. Few pension funds have made much use of the 10% allowance to Africa outside of South Africa that they are given by Regulation 28.
While this opportunity in African equities has not quite materialised to the extent that many had hoped it would, something else has been happening on the continent that has gone mostly unnoticed. The market for African government bonds has grown enormously. ‘Back in 2006, there was about $1.5bn in sovereign dollar eurobonds [bonds issued in hard currency rather than local currency] issued in Africa outside of South Africa,’ said Paul Robinson, portfolio manager at Laurium Capital (pictured). ‘Right now, there is about $85bn in sovereign dollar eurobonds outstanding, and if you add in the supra-nationals – quasi sovereigns like the African Development Bank and the African Export-Import Bank – you get to over $100bn. This has become a big, proper market, with good liquidity. ‘Two weeks ago, for example, Egypt, which is one of the big markets, wanted to raise between $2bn and $3bn,’ Robinson added. ‘The auction was so oversubscribed that they ended up raising $5bn, and they were still five times oversubscribed.’ While there is no central repository that keeps track of trade in the secondary market for African bonds, Laurium’s calculations suggest that daily trade volumes are between $50m and $500m. This is substantially more than African equities, which trade between $18m and $100m a day.
In December last year, Laurium launched the Laurium Africa USD Bond Prescient fund to give South African investors access to this growing opportunity set. Given the current volumes in this market, the fund is able to offer investors daily liquidity.The fund is currently the only strategy listed in the ASISA Regional multi-asset income category. It is not, however, the only one to predominantly offer exposure to African government bonds. The Anchor BCI Africa Flexible Income fund managed by Citywire + rated Nolan Wapenaar does too, although it has a more flexible mandate.What makes the fund’s strategy compelling is that it gives local institutional investors an attractive way to make use of at least some part of their 10% African allowance, and to do so by investing in assets denominated in US dollars. Over the last decade and a half, the returns from this asset class have also been outstanding. As thegraph below shows, since 2006 the Standard Bank Africa Bond Index has not only significantly outperformed South African bonds and equities, but has also out- performed global high yield and emerging market bonds.
Source: Bloomberg & Laurium Capital
Robinson believes that there is a good likelihood that this will persist. ‘Generally, Africa is still perceived to be a pretty risk place, so the yield has been high over time,’ he said. ‘You are picking up a lot more yield in Africa than from global high yield.’ At the end of last week, the Standard Bank Africa Bond Index was yielding 8.2% above US Treasuries. The Barclays Global High Yield Index was only yielding 6.3% above US Treasuries. The second thing is that during times of crisis sovereigns have a lot more levers they can pull,’ said Robinson. ‘We are seeing that right now. There is a lot of stuff in high yield that is going to be in trouble. Stimulus is going to keep them afloat for a while longer, but they don’t have quite the levers that sovereigns can pull. ‘Overall, we think there is actual risk versus perceived risk, which has, over time, led to African sovereign eurobonds outperforming.’ As the table below shows, African government bonds have shown higher volatility than high yield or emerging market bonds, but still far less than in African or South African equities.
Source: Bloomberg & Laurium Capital
For co-portfolio manager, Jean-Pierre du Plessis, African bonds also offer investors something distinctly different to the proposition from African equities. ‘It’s a slightly different play,’ said Du Plessis. ‘When we think about it in our asset allocation funds, we don’t think about it as the African call where we are asking about the growth prospects for Africa. ‘We see the Africa eurobonds as just attractive dollar credit where we have a particular edge and can take advantage of that risk premium, rather than a growth story. We are not necessarily buying Nigerian eurobonds because we think the economy is going to grow. We understand the risks and feel we are going to get paid.’
Written by: Patrick Cairns
Citywire [Online] // Citywire South Africa . - https://citywire.co.za/author/pcairns.