Africa Fixed Income. Old finance on an old continent makes for new things. SAAX July 2014

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Wilfrid Roberts
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1 Africa Fixed Income Old finance on an old continent makes for new things SAAX July 2014

2 Which Africa? 4mn Irish aid stolen in office of Ugandan prime minister 100mn profit after tax Guinness Nigeria (2012)

3 Africa Fixed Income Market characteristics Fig. The African in landmass is bigger than the combined size of: USA, China, India, Eastern Europe, Spain, France, Germany, Italy, Japan, the UK Switzerland, Portugal, Belgium and The Netherlands

4 Main local currency African fixed income markets 2 25% 18% 16% 14% Ghana 15% 5% Egypt Egypt Currency regime: Heavily managed Daily FX forward turnover: $30mn Size of local market: $150bn 15% Ghana: Currency regime: Free float Daily FX forward turnover: $40mn Size of local market: $5bn 2 Uganda Uganda Currency regime: Float, some intervention Daily FX forward turnover: $20mn Size of local market: $3.5bn 13% Nigeria max Nigeria: Currency regime: Heavily managed Daily FX forward turnover: $50mn Size of local market: $20b 2 Kenya Kenya Currency regime: Float, some intervention Daily FX forward turnover: $100mn Size of local market: $6.5bn 8% 6% 4% 2% Botswana Botswana: Currency regime: USD,ZAR basket Daily FX forward turnover: $30mn Size of local market: $1bn 16% 14% 12% max Tanzania Currency regime: Float, some intervention Daily FX forward turnover: $15mn Size of local market: $2bn Tanzania Source: Bloomberg, Barclays, Citi. December % max South Africa max South Africa: Currency regime: Free-float Daily FX forward turnover: Size of local market:$135bn 2 Mauritius Zambia max Zambia Currency regime: Float, some intervention Daily FX forward turnover: $40mn Size of local market: $2.5bn Mauritius Currency regime: Free-float Daily FX forward turnover: $20mn Size of local market: $2.8bn

5 New sovereign issuers of US dollar bonds tend to be from the frontier 900 Ukraine Ghana 500 Zambia 400 Slovenia Lithuania Tanzania Tunisia Nigeria Senegal Rwanda Iraq Mozambique Egypt 20s Ivory Coast Egypt 40s Lebanon Qatar Abu Dhabi Morocco Poland Israel Slovakia Malaysia Croatia Hungary Angola Gabon Namibia Turkey Romania Vietnam South Africa Indonesia Philippines 0 AAA AAA- AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ Source: Bloomberg, Investec Asset Management calculations, 4 April 2014

6 Attractive currency carry plays Short-term yields 3 25% Developed Avrg EM Avrg Frontier Avrg Africa Avrg 2 15% 5% Hong Kong Japan Singapore United States Europe Israel Slovakia Phillipenes Malaysia Hungary South Korea Mexico Colombia China Peru Indonesia India Russia Brazil Turkey Lithuania Croatia Bulgaria El Salvador Albania Vietnam Sri Lanka Pakistan Pakistan Costa Rica Serbia Jamaica Kazakhstan Mongolia Ukraine Morocco Tunisia Mauritius Kenya South Africa Zambia Uganda Tanzania Nigeria Egypt Ghana Developed Emerging Frontier Africa Source: Bloomberg, 4 April 2014

7 currencies less volatile and less correlated 2 Fig. Distribution of weekly currency returns versus the US dollar for a basket of African currencies, the euro, British pound and Australian dollar The basket of African currencies have had the lowest volatility returns % of returns that fall in indicated weekly return bucket 18% 16% 14% 12% 8% 6% 4% 2% Africa fx basket Euro GBP Australia Africa FX basket has more weeks of returns close to than the euro, British pound and the Australian dollar Weekly currency return buckets Diversification leads to stability of returns Source: Investec Asset Management calculations using Bloomberg data. Calculations: Distribution of weekly currency returns against US dollar from 1 Jan 2005 to 15 th June Africa currencies included: Nigerian naira, Ghanaian cedi, Ugandan shilling, Kenyan shilling, Egyptian pound, Mauritian rupee, Namibian dollar, Zambian kwacha, Tanzanian shilling and Tunisian dinar

8 African fixed income compares favourably with other asset classes December 2005 to December 2012 (USD) (Return/correlation data Ann Return Standard deviation Sharpe ratio Correlation with Local Africa FI Correlation with Hard Africa FI Africa LC 7.6% 7.5% Africa HC 8.7% 9.4% Local EMD 11.1% 13.2% Dollar EMD 9.5% 9.5% Global high yield 9.8% 12.9% EM equities 7.9% 26.2% Global equities 3.3% EM Currencies 5.9% 8.9% Commodities -4.6% 25.2% FTSE % 19.9% Global credit % Global bonds 6.1% US bonds 5.6% 4.5% Data from 31 December December 2012, standard deviation and correlation of monthly returns in USD Past performance should not be taken as a guide to the future, losses may be made. Data is not audited Africa LC = Equal weighting of 11 main African local currency sovereign markets; Africa HC = JPMorgan Africa bonds Index EMBI Broad Global Diversified; Local EMD = JPMorgan GBI-EM Global Diversified Composite Unhedged USD; Dollar EMD = JPMorgan Emerging Markets bonds Index EMBI GD; Global high yield = Merrill Lynch Global High Yield Index (10 hedged to $); EM equities = MSCI Daily Gross Returns USD EM; Global equities = MSCI Daily Gross TR USD World Indx; EM Currencies = JPMorgan Emerging Local Markets ELMI Plus Composite; Commodities = S&P GSCI Total Return; FTSE 100 = FTSE 100 TR; Global credit = Citigroup World Broad Investment-Grade Index (WorldBIG); Global bonds = Citigroup WGBI All Maturities USD; US bonds = Citigroup US GBI All Maturities USD

9 Market development

10 Market development: Show me the money African governments require $500bn of funding over the next 5 years We could see a US$1 trillion government debt market by 2020 Fig. Historic and projected funding needs

11 Market development: Plotting the development spectrum

12 Market development: Kicking out the yield-curve

Market development: You can buy it but can

Percentage of African government debt that

13 Market development: You can buy it but can you sell it? Fig. Percentage of African government debt by currency and maturity profile Fig. Percentage of African government debt that is marketable vs % non-marketable Fig. Ownership of marketable securities

14 Market development: Barbarians at the gate (also know as offshore capital flows )

15 Caveat emptor: Macro economic vulnerability assessment

Argentina Bahamas Barbados Bermuda Bolivia Brazil British Virgin Islands Canada Cayman Islands Chile

Argentina Bahamas Barbados Bermuda Bolivia Brazil British Virgin Islands Canada Cayman Islands Chile Americas Argentina (Banking and finance; Capital markets: Debt; Capital markets: Equity; M&A; Project Bahamas (Financial and corporate) Barbados (Financial and corporate) Bermuda (Financial and corporate)