Africa will never be overlooked by any emerging markets investor. But while most investors are only aware of South Africa, many other markets like Ghana, Uganda, Egypt and Kenya offer exciting long – term investment opportunities as well.
Sub-Saharan Africa, home to more than 1 billion people, is set to expand by 3.8 per cent next year1. While the region is recovering from last year’s pandemic slump more slowly than many developed economies, the fundamental drivers – the youngest population globally, rapid urbanisation and greater productivity gains – present a compelling opportunity, especially for longer term investors.
Africa’s 54 countries are diverse, and these differences present both opportunities and challenges for those who are willing to understand them.
With the global economy rebounding and demand for goods and services surging, accelerating inflation has started to dominate investors’ conversations. The average annual inflation rate across Sub-Saharan Africa is forecast to be 8.6 per cent in 20222. That’s higher than in many major economies, but not unusual for the region itself. More meaningfully, investors in Sub-Saharan Africa have long been compensated for higher inflation, through healthy real spreads.
Emerging-markets investors are keeping an eye on US inflation as they plan for 2022, especially after the Federal Reserve announced its tapering plans in early November.3 While there is a risk that higher US inflation may mean that tapering could be accelerated, pockets of frontier Sub-Saharan Africa may still offer resilience to any Fed tapering.
“While everyone is worried about inflation exceeding the norm in developed markets, in African frontier markets we’re not seeing much that is markedly different from what investors have been used to,” says Razia Khan, Head of Research for Africa and the Middle East at Standard Chartered. “Investment flows into these markets should remain resilient into next year, especially since investors are compensated by sizeable real yields in local currency markets.”
Enticing capital market opportunities
In addition to economic fundamentals, factors such as progressive structural reforms and deepening capital markets contribute to the investment case for many African countries.
The region’s corporate bond market is a good example. The market in Sub-Saharan Africa is still relatively small at about USD150 billion4, and dominated by South African companies. But this only underscores the potential for growth, as investors and businesses in the region search for new methods of financing.
The success of Liquid Intelligent Technologies’ USD620 million bond sale in early 2021, which was led by Standard Chartered as a global coordinator, highlights the appeal Africa’s corporate bond market now has for global investors. The communications company, which is focused on eastern and southern Africa, sold the bonds with a lower coupon rate than its first bond sale in 2017, and the order book was more than five times oversubscribed.
Opportunities in currency markets
Many overseas investors in Africa first enter the market by buying eurobonds issued in non-African currencies – predominantly USD – to limit risk from exchange-rate swings and remove complications in repatriating profits. These securities can offer a significantly higher yield than debt issued by developed countries.
Nigeria, for example, raised USD4bn in a eurobond issue in September, including a 30-year tranche at a yield of 8.25 per cent5. Interest in the issue was strong, with investors demanding more than four times the amount on offer.
Potentially greater rewards can be found in the local-currency market, which is also significantly larger than the eurobond market. Investors in this market have to contend with greater risk, and mine down into the complex processes driving value in each country.
Zambia is a case in point. The country defaulted on a eurobond payment last year6, yet now finds its local currency debt in demand. What changed? The leadership: investors are betting that the new president, Hakainde Hichilema, will steer the country towards an economic recovery7.
Still, eye-watering yields aren’t always what they appear. Yields on Zambia’s five-year notes issued in August came in at 25 per cent, but because that was just slightly above the rate of inflation, the real return at the time was negligible. Yet Zambia’s currency, the kwacha, appreciated after the election; with more conservative fiscal policy, inflation could slow, sending real returns on local-currency debt higher.
Timing commodity cycles
Most African countries are heavily dependent on the trade of commodities. Some will ride the ebb and flow of commodity cycles; think of major oil producers such as Angola and Nigeria, and copper producers including the Democratic Republic of Congo and Zambia.
Exporters of agricultural products such as cocoa, coffee, tea and cotton are subject to cycles of extreme weather. And the course of economic and business policy across the continent is subject to the results of election cycles.
Finding inflection points
Inflection points in these cycles can be the best time to invest. Get in after a strong reformer heads up the government and you could benefit from surging growth and an improving investment climate.
Sound governance has helped the small west African country of Benin to retain market access at reasonable yields. When G20 countries agreed during the first wave of the pandemic to suspend repayments on bilateral debt from countries including Benin, the finance minister said such measures could jeopardise future access to financing8.
Benin instead refinanced short-term debt, issued longer-dated debt at lower cost and pursued credible reforms that have helped compress spreads.
Weighing all the risks and rewards in Africa, Shahryar Naghshbandi, Standard Chartered’s Head of Macro Trading, AME, says Uganda and Egypt are his top picks. “They stand out in a very meaningful way, and I’m confident in their progress over the next year or so,” Shahryar says.
Among smaller markets, Uganda is notable for the commitment of its central bank to keeping the market relatively open. “Investors can get into and out of that market with very little difficulty,” he says. “They’re not putting up barriers as some other African markets are doing.”
Egypt, among the larger markets, comes out on top thanks to rules and processes that make it easy for international investors to access the market. “The repatriation method for offshore investors is robust,” says Shahryar. “It’s been tested. Because of that we’ve seen inflows into that market again this year.”
This article is based on themes discussed during a panel at Standard Chartered’s recent conference, Emerging Markets 2022: Investment strategies for a brave new world. View the recording.
1 International Monetary Fund Regional Economic Outlook for Sub-Saharan Africa (October 2021)
2 International Monetary Fund Regional Economic Outlook for Sub-Saharan Africa (October 2021)
3 Federal Reserve Press Release (3 November 2021)
4 ICMA estimate as of July 2020
7 Bloomberg News (30 August 2021)