The misconceptions of the risks associated with investing in Africa are most acutely expressed within the valuations of local African debt markets, says Mahan Namin, a portfolio manager at Insparo Asset Management.
Within North Africa, currencies are heavily managed against baskets that include large Euro weightings due to strong political and economic ties resulting from close geographical proximities to Europe.
While FX forward markets exist, some deliverable and some non-deliverable, with the exception of Egypt, market size and liquidity is poor, and access to the local debt markets is largely restricted to local investors.
South Africa has the most developed, liquid and sophisticated local market in Africa.
The full spectrum of instruments including FX forwards, FX options, Interest Rate Swaps and Forward Rate Agreements trade actively there, as well as the sovereign yield curve which is well-defined, liquid and extends out to 30 years.
But because the market is at such a relatively developed stage, as an outright long position, asset prices are influenced by global sentiment with a high market beta. We therefore exclude it from the core mandate of our flagship multi-strategy Insparo Africa and Middle East Fund.
Instead, we look to capture what we feel is the highly attractive and uncorrelated “frontier risk” premia that is frequently misunderstood and mispriced in the region.
Take for example the Zambian kwacha which, prior to the recent global sell-off, had traded in a range of only 3.5% against the US dollar in the first half of the year.
But long-dated sovereign bonds yielded more than 16% annualised over that period, despite 2012 inflation forecast at only 7.3%, real GDP growth forecast at 7.4% and outstanding total public debt (including external) forecast at only 23.7% of GDP.
By contrast in South Africa, the rand ranged 10% over the same period and no part of the curve yielded more than 8.5%.
In August and September, both countries suffered from similar idiosyncratic concerns over potential foreign investment restrictions on their mining industries while global risk markets also plummeted.
However, the most the kwacha depreciated over that period was 7.5%. It has already retraced the entire move, whereas the rand at one point was 30% weaker than its August open. It has retraced 10% of the move as of writing.
Ghana, one of Africa’s most politically stable and democratic states, is a very good example of the impact of the continent’s under-exploited resource endowment.
The UK firm Tullow found oil in Ghana in mid-2007 and started production on 15 December 2010.
The revenue from oil has already resulted in a year-on-year real GDP growth of 33% in Q2, as well as a significant improvement to their balance of payments position both via foreign direct investment and via oil exports.
Arab spring effects
Given liquidity constraints in the equity market, as well as the higher beta and relatively low yield of the benchmark 2017 Eurobond, the local bond market continues to be our favoured investment for taking exposure to Ghana.