- Zambian notes accounted for a third of bond fund’s returns
- Allan Gray buying Nigerian Treasury Bills after naira slump
A year ago, Nick Ndiritu, a portfolio manager at Cape Town-based Allan Gray Ltd., took a bet on the world’s worst-performing debt.
The Zambian bonds Ndiritu bought at the height of the southern African nation’s currency crisis have returned 29 percent this year as the economy rebounded, helping to boost returns at the Allan Gray Africa ex-South Africa Bond Fund to almost double its peer average. Now Ndiritu is seeing value in local-currency debt of African nations including Nigeria, whose naira bonds have lost 43 percent for dollar investors this year, the most among emerging markets.
Ndiritu has bought Nigerian Treasury bills since the central bank abandoned its naira peg in June, sending the currency tumbling 37 percent. With yields of around 20 percent, the Nigerian securities offer enough compensation for the risks of further currency depreciation and an economy in recession, he said. The same applies to other African nations hammered by currency declines and the global commodity slump.
“We’ve taken a long-term perspective in looking at a number of these African markets and what we see is that when sentiment is often negative and there’s negative news flow, these bonds get marked down,” said Ndiritu. “Rather than a specific market or a specific country, we’re thinking more generally that the local-currency markets are starting to look attractive.”
Ndiritu’s $220 million Africa ex-South Africa Bond Fund has posted capital gains of 9.7 percent this year, compared with the average 4.9 percent gain of similar funds, data compiled by Bloomberg shows. Total returns were 13.9 percent, according to the company’s website, with the Zambian dollar bonds accounting for almost a third of those, Ndiritu said.
Emerging-market debt is seeing record inflows from investors looking for higher yields than those available in developed nations, where interest rates are close to or below zero. With yields that are on average 2.32 percentage points higher than the emerging-market average, African dollar bonds have been in particular demand, posting returns of 16 percent this year compared with the developing-nation average of 13 percent.
The chase for yield means investors may overlook country-specific risk in Africa and not demand a high-enough premium for holding some of the debt, Ndiritu said.
“We’re more cautious when we believe in part what’s driving this bullish sentiment is really global liquidity,” he said. “For a number of these African credits, as we saw in Zambia for example, the macro drivers tend to be a big part of the story for the returns.”
Zambian debt accounted for 15 percent of Ndiritu’s Africa Bond Fund at the end of September last year, at a time when the country’s kwacha was the worst performer in the world and a slump in copper prices was cutting government revenue, forcing an increase in borrowing. Since then, the government has moved closer to concluding an aid package from the International Monetary Fund that would help curb the budget deficit.
Yields on Zambia’s 2024 dollar bonds dropped 6 basis points to 8.97 percent by 12:50 p.m. in Lusaka, the capital, from as high as 16.3 percent in January. These levels are still attractive for Allan Gray as it believes the copper-producing country is making good progress in helping to boost its economy, Ndiritu said.
In Nigeria, investors may have lingering concerns about the government’s control of the foreign exchange market even after the central bank abandoned its currency peg, which had strangled manufacturers and deterred foreign investors, Ndiritu said. Still, the naira is now much closer to a level where investors would feel comfortable buying local-currency assets. Nigerian debt, including foreign currency bonds, accounts for 47 percent of the Africa ex- South Africa Bond Fund, he said.
“In times like this we look carefully at other markets where we think investors may be overlooking,” he said. “In this particular case we’re looking closely at the local-currency markets where we believe we can still find very attractive risk-adjusted returns.”