Investors choose sub-Saharan African bonds over equities

Sub-Saharan African bonds are making a comeback at the expense of equities as investors, requiring some sort of security even when moving into the riskiest of assets, take courage from multilateral support for the region.

Stocks in the region haven’t participated in the global rally of 2009, with the MSCI Frontier Africa index down 17% year-to-date while the Emerging Markets index is up 45%.

Even the broader MSCI Frontier Markets index, which gives a larger weight to the Middle East than to Africa, has been able to recoup a mere 10% after heavy losses last year.

The difference illustrates how more mature emerging markets such as Brazil, Indonesia and Turkey have taken the spotlight this year with political stability and better fiscal management, leaving some riskier countries off the radar.

But the fixed-income market tells another tale. With stable oil prices and support from the International Monetary Fund, West African nations’ bonds are attracting investor interest.

“The story is much different here … we’ve seen a rally that’s somewhat in line with emerging markets,” said Stuart Culverhouse, chief economist with Exotix, a London brokerage specializing in illiquid assets.

African bonds have gained around 25% this year according to JPMorgan’s Emerging Market Bond Index Global, outpacing the index as a whole, which has gained 19% during the same time. In particular, riskier names like Ghana and Gabon have seen their bonds rally 75% and 57%, respectively.

Yields on these West African bonds have tightened significantly as buyers have stepped up. The price of Ghana’s benchmark 2017 eurobond has gone to 95 recently from 50 earlier in the year, bringing the yield down to 9.4% from 20%.

Gabon’s benchmark 2017 eurobonds have gone from trading around 68 to par, with the yield contracting to 8.4% from 15%.

Even the spreads on companies in Nigeria’s embattled banking sector, including Guaranty Trust Bank PLC (GUARANTY.LA) and First Bank of Nigeria PLC (FIRSTBANK.LA), have contracted considerably while the MSCI Nigeria stock index remains in the red by 23% in 2009.

The IMF’s pledge earlier in the year to support African economies, along with stable oil prices, has helped investors step beyond some of the bigger players in the emerging markets world, confident that the risk of default has diminished drastically.

Also, investors may be eyeing the region since bond yields in many larger emerging markets have fallen with the flood of buyers, said John Bates, a portfolio manager with London firm Silk Invest, which plans to launch a frontier markets fixed-income fund next month.

The increased investor confidence has prompted several African nations to tap international markets to finance operations. The governments of Ghana, Tanzania, Uganda, Kenya and Zambia are all on the waiting list for sovereign debt issuances between $300 million and $500 million in the near future.

“We could see some action in the next few months, but most likely in early 2010. It’s not a question of if, just a question of when,” said Ridle Markus, an Africa strategist with Absa Capital in Johannesburg.

Some corporate issuance could also be in the offing as companies use the opportunity to issue debt, since equity markets haven’t been too encouraging.

OandO PLC (OANDO.LA), Nigeria’s largest oil-trading company and fuel retailer, earlier this month said it plans to raise 200 billion naira ($1.3 billion) to fund growth plans. The funding could include some local currency debt issuance, market watchers say.

Still, with the uncertainty in global economies, and many developed markets still laboring through the financial markets mess, investing in sub-Saharan African assets is a bit of a risk.

“I would be very cautious moving into these markets,” said Devan Kaloo, head of global emerging markets at Aberdeen Asset Managers. While there is potential for gains, the political risk tied to many of these markets can outweigh the positives, he added.

Source: WSJ

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