Africa Forum - October 7, 2013

EMTA FORUM ON SUB-SAHARAN AFRICA
Monday, October 7, 2013 

Hosted by
Millbank Cinema and Media Centre
Millbank Tower
21 - 24 Millbank
London, SW1P 4QM

3:45 p.m. Registration  

4:00 p.m. Panel Discussion
Opportunities and Challenges for Sub-Saharan Africa
Stephen Bailey-Smith (Standard Bank) – Moderator
Kevin Daly (Aberdeen Asset Management)
Mohammed Hanif (Insparo Asset Management)
Didier Lambert (J.P. Morgan Asset Management)
Nema Ramkhelawan-Bhana (Rand Merchant Bank)

5:00 p.m.
Cocktail Reception  

Additional support provided by Rand Merchant Bank.
Attendance is complimentary for EMTA Members. The registration fee for non-members is US$495.

Investors See Growth, and Alpha, in Sub-Saharan African Markets 

“Africa has moved from the margin of EM investing to being the center of interest of the new frontier markets,” declared moderator Stephen Bailey-Smith at the opening of EMTA’s first Forum on Sub Saharan Africa in three years.   The event was hosted by Standard Bank in London on Monday, October 7, 2013, with 125 market participants attending. 

In addition to Bailey-Smith and analyst Nema Ramkhelawan-Bhana (Rand Merchant Bank), the Forum featured three investor speakers, each of whom identified the role of sub-Saharan African debt in their portfolios.  Mohammed Hanif (Insparo Asset Management) described being motivated in 2007 by the lack of coverage of African debt to set up his own Middle East and African-dedicated hedge fund.  JPMorgan Asset Management’s Didier Lambert revealed that his involvement in Africa was opportunistic, while Aberdeen Asset Management’s Kevin Daly detailed his firm’s being involved in African external debt since 2007, with growing exposure to local markets as well in recent years. 

Speakers discussed their expectations for US Treasury rates, and how the sub-Saharan African markets would be affected.  Daly, who expected 10-year UST rates to trade in the 2.85% to 2.95% range post a US government-shutdown resolution, argued attractive yield opportunities existed in the frontier market sector.  “The Mozambique issue was mispriced, reflecting little knowledge of the credit, the confusing structure and lack of a road show.  Tanzania has done well, but we all know supply is coming, so that could limit the upside, and Kenya could be interesting if they have to price it to sell a large bond,” he stated. 

For Lambert, the carry on sub-Saharan African debt at the time of the Forum was “decent,” enough to justify owning the debt Hanif expressed his view that the US FOMC would not taper its bond-buying program in the near future, and expected sub-Saharan African debt to outperform.  He seconded Daly’s recommendation on Mozambique, calling the debt “a steal.” 

Polled on which countries to avoid, Hanif noted that it was difficult to short African sovereigns.  Daly expressed concern on Ghana.  “The market has consistently given them the benefit of the doubt, but they haven’t delivered on their promises.  I hope they surprise us on the upside,” he stated.  Daly also reminded attendees that the lack of credit ratings reduced the audience for some sub-Saharan African paper, and believed that countries such as Ivory Coast and Tanzania could find additional support once they applied for credit ratings. 

Hanif advised investors to monitor outflows from the continent’s FX markets.  “Thus far, the outflows have been miniscule compared to the inflows, but there is more to go, and we have to keep an eye on it.”  For Lambert, “one can’t deny that some value has been created over the past three months [from the recent sell-off]; how much is hard to measure.”  The lack of correlation of African currencies to mainstream currencies, such as the MXP, should attract real money account attention, according to Lambert, “although zero correlations could not by themselves justify long positions, and thorough analysis still has to be done to select the best investments.” 

Ramkhelawan-Bhana favored the Nigerian naira and Kenyan schilling on a short-term basis, while observing that the ZAR was highly correlated to EM outflows.  Hanif viewed African currency markets as generally too illiquid to invest in (“the bid-ask spreads make it too expensive”) unless one had a strong view. 

Daly advised investors to avoid the cedi, “although it could be a great trade if the Ghanaians perform better than expected on the fiscal front.”  This provoked further discussion on Ghana, with Lambert suggesting that he would be willing to bet on the cedi.  In contrarian style, Bailey-Smith expected outperformance from Ghana because, “all the bad news has been priced in, and Finance Minister Seth Tekper has lost popularity domestically for raising fuel and utility prices, which is probably a good sign.”  Ramkhelawan-Bhana saw the next 18 months in Ghana as being too uncertain to make a call, adding that the country “tends to over-spend during election years.”  However, she predicted a restoration of market confidence could occur once oil revenues increased and government spending were brought under control.   

The three investor speakers, asked to make the case for buying African debt, each voiced a different rationale.  For Hanif, growth was king.  “Sub-Saharan Africa is expected to grow 8% over the next decade, after growing 6% in the past decade.  If you don’t play here, you are missing out on an opportunity.”  Daly argued that the continent was under-researched and under-owned.  For Lambert, benchmarked investors would most likely be interested in the alpha sub-Saharan Africa can contribute to returns.  Ramkhelawan-Bhana added factors such as an emerging middle class looking for consumer goods, structural reforms, and more sustainable debt ratios. 

The event concluded with audience questions, before adjourning to a cocktail reception.  Panelists discussed the lack of investable debt from francophone African countries (with the exception of the Ivory Coast).  Questioned on liquidity, Bailey-Smith acknowledged that it was unlikely that African local debt would ever become as widely traded as more mainstream EM credits any time soon, while highlighting that liquidity had increased dramatically in the past five years.  Finally, he concluded that greater sub-Saharan African liquidity could prove a double-edged sword (“It is their idiosyncratic nature that gives you such great alpha, no?”). 

EMTA expects to announce future Sub-Saharan African Forums in New York and South Africa.  EMTA members interested in such events should contact Jonathan Murno of EMTA at jmurno@emta.org.