Bombs From Abuja to Nairobi Fail to Slow Africa’s MarketsChris Kay
After a series of bombings hit Nigeria’s capital this year, several investors set to join Ridle Markus on a trip to Abuja postponed because of security concerns.
While not all of them made the journey with the Johannesburg-based Barclays Africa Group strategist in June, Markus said some of their money found its way into the bond market of the continent’s largest economy. Confidence in World Bank predictions that sub-Saharan Africa will post the world’s fastest growth outside of Asia for the next three years helped Nigerian naira debt return 13 percent in 2014, the best of 16 emerging markets tracked by Bloomberg after Turkey.
“Despite the violence in Nigeria, the opportunity can’t be ignored,” Markus said by phone from Johannesburg on July 29. “That is the ultimate view of many of our investors.”
Investors are looking past intensified attacks by Islamic militant groups Boko Haram in Nigeria and al-Shabaab in Kenya as unprecedented stimulus from central banks including the Bank of Japan, the Federal Reserve and the European Central Bank spurs demand for riskier debt to boost returns. African nations from Zambia to Ivory Coast have raised $4.75 billion of dollar debt this year, with another $1.5 billion planned by Ghana, after record issuance in 2013 of $6.25 billion.
Money is also flowing into stocks. The MSCI EFM Africa Index rallied 11 percent this year, outperforming the 7.5 percent gain of the MSCI EM Index. Equity portfolio inflows into the region are set to rise to $14.8 billion in 2015 from an estimated $13.7 billion this year, according to the World Bank.
The World Bank projects African growth of 4.7 percent this year, spurring U.S. President Barack Obama to step up efforts to forge closer ties when he hosts more than 40 of the continent’s leaders at a summit in Washington next week. The U.S. is also looking beyond securing deals and access to a consumer market of 1.1 billion people to counter security threats.
High-profile attacks have “impacted on investor perceptions of security risks in these countries, deterring some investors from expanding their footprint or even traveling to these countries,” said Roddy Barclay, a London-based analyst at consultancy Control Risks Group. “Running counter to these developments are the strong economic growth fundamentals and rising number of business opportunities for investors.”
Boko Haram, whose name means “western education is a sin” in the local Hausa language, has been fighting security forces in Nigeria for the past five years, bidding to impose Islamic law in Africa’s top oil producer and killing more than 2,000 people in the first half of 2014, according to New York-based Human Rights Watch.
The al-Qaeda-linked al-Shabaab militant group is attacking Kenya in retaliation for the deploying of its troops in Somalia, where the militia is trying to overthrow the government. The assaults cut arrivals by Kenya tourists 18 percent last year and emptied hotels in the port city of Mombasa.
“I see that a lot where investors are saying ‘ok maybe I won’t visit you this year, but I’ll come and visit you next year,’” Larry Seruma, chief investment officer at Princeton, New Jersey-based Nile Capital Management LLC, said by phone. “A lot of people who are committing money to these countries are really taking a much longer-term view.”
Many investors shrug off the violence. Christian Mejrup, who helps manage $2.2 billion, including African debt, at Kolding, Denmark-based Global Evolution AS, wasn’t deterred from visiting Kenya’s capital, Nairobi, last week.
“All public buildings and hotels seems to be well guarded and you always have to pass through metal detectors and get your belongings scanned before entering such buildings,” Mejrup said by e-mail. “Continued deterioration of the security level will pose a risk for the investment climate in Africa, but we have not yet seen any indication of such.”
Violence is not the only risk investors need to look past. Governments in Ghana and Zambia are struggling to finance their budgets less than a decade after having most of their debt written off. Both countries had their credit ratings downgraded in the past year, while Ghana’s cedi dropped 35 percent against the dollar in 2014, more than any other currency, pushing inflation to 15 percent in June.
In Kenya, attacks along the coast are threatening tourism, a major impetus of growth, Gerard Kambou, a senior economist at the World Bank, said by phone from Washington on July 24. Tourism generated more than $1 billion in earnings last year, the most after tea exports. Elections in Nigeria and Ivory Coast next year may create policy uncertainty and slow inflows amid the risk of increased U.S. interest rates, he said.
“Bad news creates opportunities,” Andrew Lapping, who oversees Cape Town-based Allan Gray Ltd.’s two Africa-focused equity funds, said in July 30 note on the company’s website. “I far prefer to invest in companies where things are dire and the dire scenario is expected to persist. This way time and valuation are on your side. With time, very bad economic situations usually improve.”
Allan Gray’s Africa ex-SA Equity Fund is 20 percent invested in Zimbabwe, the continent’s worst-performing stock market this year with losses of 8 percent. It holds Delta Corp., the SABMiller Plc associate that brews Chibuku sorghum beer, and Econet Wireless Zimbabwe Ltd., the nation’s biggest mobile-phone company. Zimbabweans aren’t spending, deflation has taken hold and factories are being shut less than a year after President Robert Mugabe, 90, extended his 33 years of rule by winning a disputed election.
Governments are taking advantage of bond yields near record lows to lock in favorable borrowing rates as central bank stimulus bolsters demand for emerging-market assets. Ivory Coast returned to international markets this month, selling $750 million of 10-year bonds, less than four years after defaulting on $2.3 billion of bonds during civil unrest that killed more than 3,000 people. It received bids of about $4.75 billion.
“There’s a huge appetite for African paper,” Central Bank of Nigeria Deputy Governor Kingsley Moghalu said in a Bloomberg TV Africa interview in London on July 24. “Foreign portfolio inflows into Africa will probably continue to rise, but that depends on monetary policy.”
Kenya in June sold $500 million of five-year securities and $1.5 billion of 10-year bonds. Yields on the securities due June 2024 have dropped 96 basis points, or 0.96 percentage point, since being issued to a record 5.92 percent yesterday. Yields on Nigerian notes maturing July 2023 declined 82 basis points this year to 5.1 percent, its lowest.
Nigeria has the potential to be one of the world’s top 20 economies by 2030 with a consumer base exceeding the current populations of France and Germany, New York-based McKinsey & Co. said in a report last week. The naira strengthened 0.7 percent this month, after six straight weekly gains.
“Many investors still believe that the risk of being in Nigeria by far outweighs the costs of being there,” Markus of Barclays Plc’s Absa Capital unit said. “It has price stability, currency stability, the economy is still on a good run, the fiscal deficit is insignificant and the current account is in surplus.”