The World’s best performing fund – Stone Harbor Investment Partners – is ramping up on African Dollar debt from Zambia, Angola, Ghana, Gabon and Ivory Coast. Stone Harbor is focusing on these countries as they are the best performing currently. These Eurobonds have recorded the biggest narrowing in credit spreads over the last one year. The fund is trimming its holding in emerging markets such as Brazil and Mexico. Jim Craige who manages the fund says sub-Saharan countries were unfairly punished in 2016 and now present the best value in developing nations. Their credit spreads narrowed 331bps-568bps over the last 1yr as the United States Dollar weakened and commodity prices – copper, oil, cocoa and gold – rose higher.
With the world paying negative and low yields, Africa is the most attractive destination for those in search for yield and Stone Harbor Investments have smelt the coffee, ZBT carried in its note to clients.
After a multi-year rally sent emerging-market bond gauges to record highs this month, investors are looking to riskier credits from lesser-known debtors to juice returns. While countries like Angola and Zambia don’t have the on-time payment track records of more established counterparts in Latin America, their sovereign dollar notes yield about 7.3%, almost twice the rate for Mexico’s debt and three percentage points above Brazil’s.
Nations like Zambia and Ghana had spreads widen to 1200-1300bps as yields even touched between 13% -14% when commodity prices were at their weakest. It is encouraging to see that current yields are somewhat closer to where the paper was issued. Zambia’s paper was sold at the following prices Sept.22 -5.25%, Apr.24 – 8.675% and Jul.27 – 9.375% but now trades between 6.77% and 7.56% on average. Many Analysts are of the view that the time is opportune for African nations thinking of selling debt at these levels but then again most nations are trying to manage debt positions as they are either on or are trying to get onto IMF programs. Just the mere fact that these nations deal with IMF is a defector guarantee to potential buyers of their respective paper and it also assists with more attractive pricing.
“It was tough to find sponsorship for owning a lot of these names,” said Craige. His Emerging Markets Total Income Fund and Emerging Markets Income Fund delivered the top two returns this year as of Sept. 22 out of 229 emerging-market hard-currency debt funds with at least $100 million in assets that report performance to Bloomberg. “But we thought they were very attractive.”
Overweight positions in Brazil, Mexico and Argentina helped lift the net asset value return on Craige’s total income fund, which invests in both sovereign and corporate notes, to 19% this year. But now he says prices are stretched, particularly in Brazil and Mexico sovereigns. He’s kept a sizable holding of Argentina’s euro-denominated government bonds and smaller positions in Petroleo Brasileiro SA, Cemex SAB and Petroleos Mexicanos hard-currency notes.
“We have gone from a very large overweight to more modest overweight,” he said.
The sub-Saharan countries Craige is targeting have lower credit ratings than Brazil or Mexico and face significant domestic challenges. Angola, Africa’s second-biggest oil exporter, suffers from a shortage of hard currency and growing debt levels after the sharp drop in crude prices. Ghana is in the midst of an International Monetary Fund program and Zambia is negotiating one. Even Ivory Coast, which is considered the safest country with a rating just one step below Brazil, had a series of mutinies by soldiers this year.
Craige says the higher yields are worth the greater risk. He sees commodity prices as unlikely to fall much further, and expects the IMF to support countries that require its guidance.
Furthermore, the cash flow needs of these countries are relatively low for the region and indicate they should have no problem making good on their obligations.
Citi Says Prepare More for Oil Squeeze Than OPEC Supply Gain But the best reason to hold these countries’ debt, he says, comes from the positive external backdrop: Namely, emerging markets are just in the beginning of a bull-market cycle, so it makes sense to pick the ones with the best yields. Stone Harbor forecasts developing economies will expand about 5 percent this year; that compares with a median forecast of 2% for Group of 8 countries, according to estimates compiled by Bloomberg.
“The underlying fundamentals are improving significantly in emerging markets,” Craige said
(Some extracts are referenced from Bloomberg)