Adventis Africa Enhanced Income Strategy

FEBRUARY 2020

STRATEGY COMMENTARY

For the month of February, the strategy returned +38bps, and year-to-date the strategy has returned a positive X%. For the calendar year 2019, the strategy returned a positive 10.7% in USD, while its benchmark returned 5.49% in USD.  The strategy remains ahead of its benchmark over one year, three years and since inception

Emerging market bonds gave up prior period gains amidst the global spreading of COVID-19. The JP Morgan EMBI Global Index posted a February performance of -0.81% for the month whist maintaining a +0.91% year-to-date. Africa faced a similar path. The SBAFSO (Standard Bank African Bond Index) had a negative return of -1.62% for February and -0.31% year-to-date.

Top performing African currencies for the month (vs the US dollar) were the Ghanaian cedi (+1.96%), the Seychellois rupee (+1.74%) and the Egyptian pound (+1.25%). Conversely, the Namibian dollar (-4.21%), the Zambian kwacha (-4.03%) and the Mozambican metical (-2.22%) lost ground against the US dollar over the period.

The Adventis Income strategy has a running yield of 8.70%, higher than 2019 year-end yield of 8.27%. The duration of the strategy was decreased from 1.60 years at the start of 2020 to 1.53 years at the end of February.

FEBRUARY 2020

MARKET COMMENTARY

THE GHANA STORY: STRONG IMPROVEMENT IN MACROECONOMIC FUNDAMENTALS

Ghana returned to the market in February, with a USD3 billion Eurobond offer. USD500 million is to be utilised for the repurchase of their 2023 and 2026 notes. The auction was five times oversubscribed which resulted in West African neighbours, Nigeria and Ivory Coast, pondering the prospect of also tapping into the Eurobond market once again.

Market participants may attribute the oversubscription to the market’s appetite for risk assets in African emerging markets, however, it is also indicative of the current positive backdrop of Ghana’s macroeconomic fundamentals. Since the successful completion of the IMF supported Extend Credit Facility in March 2019, significant progress has continued as authorities have built on the macroeconomic stability achieved under the programme. Fiscal discipline has improved, manifested in the Ghanaian budget deficit forecast printing lower at 4.5% of GDP compared to market consensus of 4.9% of GDP. Notwithstanding the positive prints, pressures on the budget in 2020 should be carefully monitored as election years can cause large fiscal spending.

Ghana is predominantly a commodity driven economy. The price of the Ghanaian basket of export commodities are currently supportive. The shift towards safe-haven assets, in particular gold and resultant gold price rally (+4.5% year-to-date) has significantly benefitted Ghana as the largest African gold producer, taking over the position from South Africa in 2019. Ivory Coast and Ghana dominate the world cocoa market with roughly 65.0% of global supply. Cocoa, similarly, to gold, has returned 5.16% year-to-date as the upward trend in cocoa prices is on course to return to the price highs five years prior. The third largest export is oil, which has seen a strong 55.0% growth in production numbers since 2015. Negative global sentiment has however been reflected in the oil price falling 23.45% year-to-date. As oil prices are likely to pick up in the coming months, the more pressing concern is the virus dampening China’s economic trade, Ghana’s largest oil export destination for crude petroleum. However, as Ghana imports petroleum products, the lower oil price can offset some of the losses made on the exports. Overall, the Ghanaian economy is well hedged against external shocks from the international market as their commodities act as a counter cyclical measure. If risk on sentiment improves, the oil price gains, increasing oil exports, however, if risk off sentiment continues, the demand for safe assets translates to gains on the gold price, thus the export value increases.

From a local currency perspective, the cedi lost 15.0% in 2019 but has regained 5.0% against the US dollar year-to-date. Consolidated bank forecasts for the cedi at year-end 2020 are at 6.07 against the US dollar. At this level, the expected deprecation during the year is adequately offset by attractive yields on local currency instruments. In addition to the Eurobond issuance, Ghana received USD1.3 billion inflows from the Ghana Cocoa Board (Cocobod). These recent inflows have strengthened foreign reserves projection to USD8.9 billion for end Q4 2020. This will aid potential the Bank of Ghana (BoG) in its interventions for currency stability. With inflation stabilising within the BoG target range of 8% ± 2%, the consensus is for the policy rate to remain on hold for 2020, assuming no exogenous shocks to the economy. Growth remains supportive for the sovereign, as consolidating market forecasts for Ghana of 6.4% GDP for 2020 bodes well for the fiscal outlook on the economy.

Despite the constructive outlook for Ghana, downside risks persist. The election year poses further risks to the budget and consequently the currency, although it is expected that Ghana will be better positioned from a fiscal perspective than in previous years as seen in the extension of their debt maturity profile and the accumulation of foreign reserves to assist currency intervention. Commodity production and price dependency remains although balanced between risk-off and global growth dependant commodities. Market concern lies mainly in fiscal spending. If Ghana maintains fiscal discipline ahead of the 2020 election, it will be a key factor for the sovereign’s economic outlook. The strong relations with the IMF could assist in maintaining the standards set in the previous programme.

We remain constructive on Ghana with supportive growth and fiscal prospects. The fund has increased its exposure to Ghana through local currency sovereign instruments over the past month.

Please contact Joseph Rohm (josephrohm@adventis.ltd) should you require any further information.