Investors Are Waking Up to Some of the Most-Maligned Markets

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Africa’s stocks and bonds are starting to win over investors scouring some of the developing world’s most beaten-down markets for returns.

Dollar bonds issued by Angola, Zambia, Nigeria, Ghana are the best performers in emerging markets this month, after Sri Lanka. All but one of the African equity benchmarks are up in the past month in dollar terms, with Nigeria one of the top gainers worldwide.

Yet stock markets on the continent, excluding South Africa’s, are getting increasingly cheap as their discount to developing peers continues to widen to a record. And the average spread on the region’s sovereign debt is around 670 basis points, almost double the emerging-market average and more than 200 basis points higher than global high-yield debt.

They’re set to catch up further as global investors pile into riskier assets on optimism that Covid-19 vaccines and unprecedented stimulus will revive global growth. Money managers from Loomis Sales & Co. in the U.S. to Coeli Asset Management SA in Sweden and Laurium Capital in South Africa are adding to their wagers on the continent.

“African equity markets haven’t recovered price-wise from the March and April lows,” said Paul Robinson, a Johannesburg-based money manager at Laurium Capital, which manages $1.5 billion. “Africa is perceived to be a lot more risky than it really is.”

The economies of Ethiopia, Uganda, Ivory Coast, Egypt, Ghana, Rwanda and Kenya withstood the economic impact of the pandemic so successfully that they were among the world’s 10 fastest-growing in 2020. At least five of them are expected to remain in that elite club through 2022, according to forecasts compiled by Bloomberg.

Laurium Capital, whose Limpopo Africa Fund has outperformed the continent’s markets in the last five years, sees opportunities in small- and mid-cap stocks in Egypt and Morocco as well as banking shares in Nigeria. Loomis Sayles & Co. is “looking at incrementally increasing exposure” to African debt, said Elisabeth Colleran, a Boston-based portfolio manager.

Low Valuations

Coeli Asset, which manages about $400 million of frontier-market investments, has been buying Egyptian and Moroccan shares because of “low valuations and the potential for a post-Covid rebound,” said James Bannan, a fund manager based in Malmo, Sweden.

Bannan is more selective on sub-Saharan equities, singling out Kenya as the only investible market. “Currency controls, a lack of reforms and poor economic programs make markets from Nigeria to Tanzania uninvestible,” he said.

Still, as money flows into emerging and frontier markets, lower-quality assets may outperform, including lower-rated sovereign bonds and illiquid equity markets, Renaissance Capital said. The investment bank suggested that investors hold an overweight position in Africa’s Eurobonds that would include the debt of Egypt, Kenya, Ghana, Nigeria and Angola.

“Things have been very sedate,” said Laurium’s Robinson. “We’re starting to see improvement.”

— With assistance by Aine Quinn

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