A guide to fixed interest investments
I can think of a whole list of things that are boring and mundane… but that are also good for us....
25 May is Africa Day – a day that marks the anniversary of the foundation of the Organisation of African Unity (now known as the Africa Union) and one that is celebrated across a continental union of some 55 different countries.
The world’s second largest continent spanning both northern and southern hemispheres, Africa covers 6% of the Earth’s total surface area, 20% of its total land area and is home to 16% of the population.
Its stock markets, however, remain much smaller in size: 21 of the 29 in existence are members of the African Exchanges Association and, while the three largest stock markets boast a decent number of companies listed (Egypt 830+, South Africa 400+ and Nigeria 220+) you can count on one hand those listed in the likes of Cameroon and Algeria.
However, the continent is home to some of the fastest growing economies in the world and, while investment opportunities are still very much ’emerging’, they too are growing.
We asked some Elite Rated fund managers where they are currently finding opportunities.
Claudia Calich, manager of M&G Emerging Markets Bond fund, has a 15.65%* allocation to Africa. She has selective holdings in North Africa and Sub-Saharan Africa, including bonds issued by both Egypt and Nigeria.
According to Claudia, Egypt is in an improving economic cycle. It is making ongoing progress on reforms and, importantly, tourists are returning which is helping to accelerate its growth outlook: forecasts are at more than 4% for this year and next.
Nigeria has comparatively low debt versus other African nations. “I like some financials in the country, as banks benefit from decent profitability and can now focus on loan book quality recovery,” Claudia said. “The economy has continued to progress out of recession, helped as an oil producer by the stronger oil market, although its recovery needs to be monitored closely. From a cautionary perspective, we are also mindful that Nigeria is among the lowest collectors of taxes in Africa.
Elsewhere in the region, some of Claudia’s favoured allocations include sovereign bonds in Ivory Coast, Senegal, and Ghana.
Claudia added: “Importantly, among our African country allocations, the quality of economic data available is relatively sound, which helps to gauge key factors such as their monetary policy and policy responses, and balance of payments outlooks. As with all frontier markets, a thorough assessment of their ability and willingness to pay bondholders must be included in the overall analysis.”
Aberdeen Emerging Markets Bond fund also has a 13%* holding in African bonds and the team has added to their Sub-Saharan Africa position this year – a position that was already overweight that of the benchmark.
“Angola, Ghana and Kenya all issued new bonds that were priced at attractive levels,” a spokesperson told us. “We chose Angolan and Ghanaian bonds, with both 10 years and 30 years to maturity, and 30-year bonds issued by Kenya.
“The Angolan issuance offered an opportunity to reinitiate a position, as we’ve had no exposure over the past few years due to concerns about rising debt and fiscal deficits, and an overvalued exchange rate. Since the changing of the guard back in September 2017, we’ve seen significant qualitative improvements under the leadership of new President Joao Lourenco, the currency is no longer viewed as overvalued after the devaluation in January and March, and the new finance team seems committed to the fiscal adjustment. Rising oil prices is another positive for Angola, as is their decision to seek an IMF monitoring programme (the new PCI arrangement). The improved outlook provided scope for Angola to increase the new issue to $3bn, which essentially covers the rest of 2018 financing needs.
“Like Angola, Ghana has outperformed the emerging market benchmark index in 2018 and over the past year, reflecting improved fiscal and external positions. The IMF has also changed its tune on Ghana over the past year, commending authorities for their fiscal results in 2017 as the country registered a primary surplus for the first time in 15 years.”
Another African country to see a change of leadership recently is South Africa. On the 14 February 2018, scandal-hit president Jacob Zuma handed in his resignation following a vote of no confidence from the National Assembly. By the afternoon of Thursday 15 February, new president Cyril Ramaphosa was officially sworn in as South Africa’s fifth president.
Zuma’s nine-year tenure had been tainted with slow economic growth and lacklustre stock market returns due to a stream of corruption allegations. So it is perhaps unsurprising that pro-business Ramaphosa’s win saw South Africa’s stock market rise by more than 6% within the first 48 hours of the announcement.
Matthew Vaight, who heads up the Elite Rated M&G Global Emerging Markets fund, has an 8.5%* weighting to South African equities in his portfolio. He believes the country’s recent political changes represent a positive step forward for the nation and that Africa’s economy could flourish once more.
“Ramaphosa is viewed by most commentators as a business-friendly president and has pledged to focus on job creation and boosting economic growth,” he said. “However, history has shown us that investors can get carried away about the potential benefit of political change with the prospect of reform. The initial optimism can often evaporate as the hoped-for reforms prove hard to pass and typically take a long time to take effect. We believe that the developments in South Africa offer considerable hope for the future but we remain cautious about the market’s high valuations reflecting the expectation for change.”
James Donald, manager of Lazard Emerging Markets fund, added: “While the victory of Cyril Ramaphosa is encouraging, his administration will have to regain business and consumer confidence. Ramaphosa will have to address the country’s fiscal deficit, re-attract private investment, as well as work through issues such as labour reform and property rights, particularly in the agricultural and mining sectors. Improvements across many of these areas could boost the long-term growth potential of the country and the continent.
“In our view, Africa continues to offer investors access to a young and growing population that will enter the workforce, while much of the developed world is ageing. The spending patterns of African consumers is expected to change, with spending going beyond basic necessities and extending into services and discretionary items as incomes rise and economies mature. However, structural reforms must continue to be implemented across the continent and, where possible, economies must continue to diversify beyond commodity dependency.
“We have a slight overweight to both Egyptian and South African stocks in our fund. The companies we are invested in are trading at relatively attractive valuations with high and stable levels of profitability and are primarily within the financials, industrials, consumer and telecom services sectors.”
*Source: Fund fact sheets, April 2018