Pre HIPC, borrowed money was generally squandered, funding civil wars and preserving political oppression. This was during the post-colonial era from the 1960’s up to the 1990’s. During this period, high debt service costs constrained these countries from making the necessary investments (social and economic) to grow their economies. With this initiative, they could grow their economies and they did. Since then, HIPC growth has averaged 6.5% and has remained superior on a global relative basis despite the 2008 financial crisis and even more recently the end of the commodity super-cycle.
Africa’s sustainable growth story is essentially driven by lower debt levels, the “demographic dividend”, a large commodity base, improving governance, strengthening institutions and technology. In our analysis and investment process, the most important assumption is that growth is a key enabler for issuers to borrow at stable or falling costs in the debt capital markets in the long-term. African countries are borrowing between 6-10.5% in USD in the Eurobond market and typically between 10-20% in their domestic markets
Progress of the Africa Fixed Income Market
The recent global pursuit for alternative streams of income post the 2008 crisis has motivated investor interest for niche asset classes which are typically under researched and provide higher yields. Africa debt is one of these. International investors (excluding South Africa) searching for yield in sustainably growing regions are frustrated with increasing lower or negative yields and poor visibility on growth in developed markets. South Africa based asset managers have been investing in African equities for close to a decade but that is remotely the case with Africa fixed income. The main reasons cited for not investing are bygone in our view and the landscape has significantly changed since 2011.
The rapid proliferation of regional (including SA banks) and international banks, in recent times, has significantly improved financial intermediation and thus debt market access. The Eurobond market gives investors confidence as securities are listed on developed market exchanges and clearing is done by reputable international houses, even though the issuers are all based in Africa. The size of the region’s Eurobond market is currently USD45bn and the 10 investable domestic markets are USD350bn.
Benefits to Investors
We believe the African debt; among the other Frontier Market regions (LATAM, Europe and Asia) has the best fundamentals. The most favourable growth dynamics, the fastest improving debt metrics, superior yield pick- up and thus the best risk/return profile. Also, this is an exciting time and bold opportunity for South African investors to tap into this fast growing asset class in Africa. Typically, this is for clients wishing to invest into a high growth market, with relatively lower overall risk, liquid, an alternative exposure to other regional asset classes, or simply for income and capital growth. Preserving capital and limited or no currency risk (USD investments and thus cash flows) are also potential benefits for SA investors.
In that regard, our flagship South African CIS/Unit Trust structured fund (ALUWANI Africa Fixed Income Fund previously the Momentum Africa FI fund) not only seeks to deliver an absolute return of 3M USD Libor + 5% but to outperform the more appropriate Standard Bank Africa ex-SA USD Index.
In 2015, the fund (Momentum Africa FI Fund) strongly outperformed its peers and marginally, the benchmark, setting our strong credentials in this nascent market. The fund returned -4.7% (USD) or 20.5% (ZAR) for the full year 2015. Meanwhile, the benchmark returned -4.9% (USD) or 20.3% (ZAR) whilst the second best peer returned -10.6% (USD) or 14.6% (ZAR) over the same period.
Still in their infancy, African debt markets are not without risk but offer a compelling investment opportunity when managed by experienced specialists. The fact that these markets are less developed has allowed well informed active managers to achieve outsized returns for investors in the past. This asset class has also been exploited for its major benefit of low correlation to other major global debt assets including US treasuries.
It is also worth noting, that isolated cases of heightened risk do not at all mean elevated contagion risk on regional peers and because we have a wider universe with different idiosyncrasies per country, we are still able to achieve a “best ideas” portfolio that helps us achieve our objectives for the client.
Ultimately, the ALUWANI Africa Fixed Income fund is an additional route by which clients can be a part of the Africa story in the broader sense (more investable countries). This offering should also appeal to institutional investors because it provides both structure and added transparency. This innovative product is one of the first of its kind in South Africa.
