December 9, 2019
Victoria Gorman

Laurium Capital launched the Laurium Africa Bond USD Prescient Fund on 2 December 2019.

The Fund offers competitive dollar yields at moderate volatility by investing predominantly in US Dollar African government debt.

The rich palette of investment opportunities and asset classes north of the Limpopo River continue to grow and develop year by year, opening up a full range of possibilities for investors of every timeframe and risk appetite. Stock exchanges and listed companies have long histories on the continent. Egypt had an exchange in 1883, 4years before the Johannesburg Stock Exchange, and the first stock exchange in Zimbabwe opened in Bulawayoin 1896, only 9 years after the Johannesburg Stock Exchange. These were followed by Morocco in 1929, Kenyain 1954 and Nigeria in 1960, with even tiny Rwanda getting an exchange in 2008. There are currently about 16countries with “investible” stock exchanges (although the likes of Libya, Somalia, Sudan, Cape Verde and a few others technically have exchanges, trade is negligible and so they are not included in the 16). Other established asset classes include local currency fixed income securities (mainly short-term borrowing by governments) and Private Equity (investing into unlisted companies).

However, a relatively newer asset class is currently grabbing headlines with its rapid development, strong returns and lower volatility than traditional asset classes in Africa. Africa Sovereign Eurobonds are fixed income securities that enable governments to borrow money in US dollars as opposed to the traditional method of borrowing in local currency and allow investors to avoid local currency risk by investing in hard currency instruments. In 2006 only one country in Africa had issued a Eurobond, with a total outstanding value of only half a billion dollars. Fast forward to today and there are now 20 countries, excluding South Africa, with Eurobonds that investors can choose from, with a total outstanding value of around USD85bn. Countries that investors can access easily via Eurobonds that don’t have readily-investible stock exchanges yet include Angola, Benin, Cameroon, Ethiopia, Gabon, Mozambique, Republic of Congo, Senegal. The market is extremely liquid, with around USD500m worth on bonds trading every day across over 65 instruments across the 20 countries. This market is even larger and more liquid if we include those bonds issued by a Supranational (an entity formed and guaranteed by two or more governments, examples include development finance institutions like the African Development Bank and African Export-Import Bank).

But how have these Eurobonds fared? Since late 2006 (to end August 2019) the Africa ex-South Africa Eurobond Index(provided by Standard Bank) has delivered 8.7% in USD compared to 4.1% in USD per year from the JSE All Share Index and 2.5% per year from the South African All Bond Index, and with lower volatility (See chart below). The Africa ex-SA Euro bonds have also beaten global bond peers, with the Emerging Markets Bond Index and Global High Yield Bond Index returning 6.7% and 7.1% per year in USD respectively over the same period.

Current yields look attractive. African-ex SA Eurobonds have a yield to maturity of 7.3% (in USD), which equates to a spread over the US 10 Year Bond of 5.7%. This compares well to peers, with Global High Yield bonds on a spread of 5% and Emerging Market Bonds with a spread of only 4%.

Any investor looking for a good USD yield should consider investing in African Sovereign Eurobonds, with the added benefit that this offshore asset class counts towards the extra 10% Africa exposure one may access over and above the 30%offshore allowance as per the SA Reserve Bank and Regulation 28 limit of the Pension Fund Act. In addition, the Laurium Africa Bond USD Prescient Fund exposure does not utilise any of the 75% equity exposure allowed for in Regulation 28compliant portfolios.

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