April’s headlines were dominated by the massive surge in India’s COVID cases. Daily case numbers were continuously reporting new highs with a peak of 273,810 new infections recorded on the 18th of April. The factors contributing towards the third wave include the emergence of new infectious variants, a rise in unrestricted social interactions, and a low vaccine coverage. In Africa, April had Seychelles, Ivory Coast and Kenya experience a spike in their daily cases, however, the total recorded coronavirus cases on the continent reached 4.61 million at month-end, a 9.50% increase month-on-month. The vaccine rollout across the continent gained momentum during the month as total doses administered increased to over 20.2 million, a 170% increase from the previous month. This improved coverage has been due to the COVAX initiative and vaccine support from China and Russia.
A rally in the performance of commodities (CRB Commodity Index up 5.01% in April) and a USD2 trillion US infrastructure stimulus spurred on global financial markets. Commodities were driven by limited supply at a time where global demand has begun to pick up again due to economies reducing restrictions. Emerging markets were beneficiaries of the global risk-on sentiment witnessed in April. The JP Morgan EMBI Global Index posted a return of 1.91% for April, whilst the year-to-date return lagged at -2.92%. African debt capital markets outperformed their emerging market peers, as the SBAFSOZ (Standard Bank Africa ex-SA Sovereign Bond Total Return Index) recorded a stellar 4.11% return for the month as the year-to-date returned to positive territory of 0.21%.
The strategy maintained its strategic asset allocation to diversified exposure across countries, sectors, and credit ratings. In line with our view of rising global rates, the Adventis Income strategy is positioned with a short duration bias looking for value opportunities in African sovereign debt as interest rate markets recalibrate back to pre-COVID-19 levels.
Although the US Dollar Index turned downwards in April to 91.28 (-2.09%), specific African local currencies gains were driven by idiosyncratic factors. The Mozambican metical (+15.21%) performed well for a successive month as the currency has been supported by reduced import demand, Bank of Mozambique (BOM) market support, foreign direct investment and the BOM not purchasing excess liquidity. The Seychellois rupee (+27.62%) has benefited from the economy being opened to foreign tourism and dollar revenue as the quarantine requirements were dropped. The Ugandan shilling (+2.57%) had also recorded gains versus the US dollar. The Angolan kwanza (-3.19%), Ethiopian birr (-1.27%) and the Zambian kwacha (-0.98%) recorded the largest local currency losses during April versus the US dollar.
Data releases for April were primarily the GDP prints recorded for the full year of 2020. The extent of the economic damage from the pandemic was highlighted by the magnitude of the various contractions. The archipelago nations of Mauritius and Seychelles recorded -14.9% (2019: 3.0%) and -10.7% (2019: 5.3%) respectively, whilst the resource-based economies of Namibia and Botswana announced -8.0% (2019: -1.6%) and -7.9% (2019: 3.0%) respectively. Africa’s second largest oil producer, Angola, recorded a growth contraction of -5.2% (2019: -0.5%). Only Ghana managed to avoid a recession as the West African gold and cocoa producer recorded positive full year growth of +0.4% (2019: 6.5%).
Although we have seen consistent upside risks to inflation, not all African sovereigns have felt the full extent of the price increases filter through to their CPI prints. As key commodities such as Brent crude (+29.83% YTD), wheat (+15.93% YTD) and sugar (+12.59% YTD) continue to rise, inflationary pressure on food prices, utilities, and fuel prices, are likely to remain over the upcoming months. Consistent with the decisions made by African central banks MPC over the last few months, Botswana, Namibia, Uganda, and Egypt all maintained their policy rates unchanged at their own MPC meetings in April. On balance, central banks will continue to support their economy’s economic recovery whilst the expectation is for inflation to return to within their target bands in the medium-term (a least 1-year).
Despite the US Fed chairman, Jerome Powell, reiterating their intention to keep USD interest rates low, the recent reports from the US Treasury Secretary, Janet Yellen, has conversely suggested the need for the Fed to hike rates to avoid overheating the US economy. On the back of the future uncertainty, more African sovereigns have been in contact to determine the foreign appetite of returning to the market. Angola, Nigeria, and Kenya are all reported to be in the process of considering parliamentary approval with regards to issuing additional Eurobonds at current favourable rates.
This month we profile the outperformance of the African region relative to its emerging market peers through their performance in the J.P. Morgan EMBI Global Core Total Return Index.
IN FOCUS: AFRICA SPURS EMERGING MARKETS PERFORMANCE
After a turbulent 18 months for global financial markets, the past 12 months has seen a strong rebound in emerging market (EM) fixed income performances. The J.P. Morgan EMBI Global Core Index is a broad, diverse US dollar denominated emerging markets debt benchmark that tracks the total return of actively traded debt instruments in emerging market countries. The index consists of 465 constituents. The index is used as a measurement for emerging markets performance and below are the index’s total return performance over various time periods:
Market volatility remains prevalent as various economies continue to balance the reduction of restrictions with the threat of a spike in infections, whilst the vaccine rollout in emerging markets has lagged that of developed markets. Despite the social and economic challenges facing EM countries, the market sector has delivered a strong 15.99% over 12-M.
More impressively, the performance has mainly been driven by the African continent. The backdrop of supportive US fiscal stimulus, a strong commodity cycle and the pickup in global demand, has seen a renewed interest from investors in African debt markets. Simultaneously, even the local currency markets have experienced a flurry of FX inflows as foreigners’ appetite for local instruments improved. Africa continues to offer a significant risk premium relative to their similar credit rated EM peers.
The breakdown of the geographic performance contribution and their respective weightings of the EMBI Core Index:
Although Africa is the second lowest region weighting in the index (12.89%), their outperformance over 12-M relative to the other regions has by far been the largest. Their contribution made up 32.39% towards the 15.99% 12-M index total return. The African performance further highlights the adequate risk compensation and attractive return opportunities available on the continent for investors. The price increase on commodities such as Brent crude (+116.13%), copper (+90.48%), coffee (+33.73%) and gold (+4.90%) over 12-M, has provided the fiscal and external support for the sovereigns’ balance of payments and revenue generation. The commodity price increases have bolstered the individual
African sovereigns returns, thus contributing to Africa’s overall 12-M outperformance.
The breakdown of the sovereign performance contribution and their respective weightings of the African region:
Africa’s regional performance in the index was diversified across the continents included sovereigns. Special mention needs to be made of the accommodating impact in the oil price for the oil producing nations, such as Angola and Nigeria, that stand-out as the top performers. Across the continent, the sovereign performances have been buoyed by the opening of global economies with nations current accounts improving significantly, as exports have soared, while import demand has remained subdued.
Strain on public finances and state budgets induced by the pandemic have seen material reallocation of limited resources making it more likely that we see further countries seek assistance using International Monetary Fund (IMF) programs. However, the successful involvement of the IMF on the African continent continues to bode well for Balance of Payments improvement and the fiscal sustainability outlook for the participating nations. The IMF recently (23rd March) announced a possible special drawing rights (SDR) allocation of USD650 billion to support the global recovery and emerging market prospects.
The Adventis Income Strategy remains constructive on the opportunities in African capital markets as the strategy holds exposures to multiple sovereigns who are constituents in the JP Morgan EMBI Global Core Index. In addition, the strategy receives the benefits from the African fixed-income high-yield opportunities in a low global rate environment and gains indirect exposure to various commodity themes. The strategy continues to hold regional exposures across the continent, identifying capital appreciation and stable income return opportunities supported by solid macro fundamentals.
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