With global growth subdued, African markets are outperforming their rivals.
As the global economy muddles through, African equity, FX, local bond and Eurobond markets are all outperforming, speaking to rising appetite for risk, according to a new report by Standard Bank.
Africa’s “teflon-coated” Eurobonds have been star performers. Standard Bank’s African Sovereign Eurobond index is up over 23 percent year-to-date, compared to JP Morgan’s benchmark EMBI Global index, which has returned just over 14 percent.
In fact, the continent is home to the “best performing eurobond on earth this year”, says head of Africa research Stephen Bailey-Smith. Côte d’Ivoire’s sovereign bond, due 2032, has returned almost 70 percent so far this year – and with government set to announce a repayment schedule for missed coupons following political upheaval in 2010, there’s further price appreciation to come, Standard Bank anticipates. Egypt and Senegal have been other outperformers, with sovereign bonds returning more than 20 percent.
Once a savannah for international bonds, African countries are issuing paper thicker and faster as they look to access finance from investors on the hunt for better returns. Since Ghana became the first African country outside South Africa to issue an international bond in 2007, it has been joined by the likes of Gabon, the Democratic Republic of Congo, Angola, Namibia and Nigeria. Last week, Zambia’s debut $750m, 10 year Eurobond became the continent’s most successful bond launch, with an order book of $12bn.
More will follow. Nigeria, grappling to finance vast gas and power projects, has another $1bn Eurobond planned for 2013. Morocco is mulling a possible dollar-denominated sovereign bond issue of similar value this year. And with sovereign benchmarks set, corporates are jumping on the bandwagon. Nigeria’s First Bank is set to issue a $500m, 10 year Eurobond by the first quarter, while another of the country’s lenders, Access Bank, recently concluded a debut $350m five year international bond issuance, yielding 7.25 percent. United Bank of Africa also plans to launch a $500m Eurobond by early next year, to finance expansion in Africa.
Local bonds are set for price appreciation too. “Although duration returns in Ghana and Nigeria’s local bonds have been huge recently, we see further yield compression in coming months. We expect Egyptian duration to deliver the largest returns going forward,” the report says.
But it’s not only debt markets that are doing well. Standard Bank says that its index of 10 African currencies has performed better than its higher EM10 FX index since May. “The best performing local rates trades have been in Africa,” says Mr Bailey-Smith. And after an underwhelming 2011, African equities are outperforming this year, driven by strong stock market performances in Egypt, Kenya and Nigeria.
“Although the strong returns have benefited from a more constructive global risk environment since late May, the outperformance is the product of strong endogenous structural and cyclical stories, which we see continuing for some time yet,” the report argues.