Kames Capital: No bubble in African debt markets as investors search for yield

African debt markets continue to offer investors an attractive alternative source of yield, despite a significant issuance programme in the first quarter, according to Kames Capital’s Theo Holland.
The first quarter of 2018 has seen issuance from countries including Egypt, Kenya, Nigeria and Senegal. This included a $4bn sale of Egyptian debt, $1.5bn of which was 30-year paper, and a Kenyan debt auction of $2bn in 10 and 30-year debt, which attracted $14bn of offers[1].
While some investors have warned the ramping up of debt from such countries is the sign of an overheated market, Holland, co-manager of the Kames Emerging Market Bond Opportunities Fund, says debt from these nations is worth investing in given the current environment.
“Some commentators have seen the recent issuance as some of sort of market top or overreach,” he says. “While the issuance profile has undoubtedly become more ambitious, our view on the continent remains a constructive one.”
“The pace of bond issuance has been significant in the past five years, but overall debt levels are still manageable.”
Holland says a combination of factors has created a lot of possibilities for investors.
“In terms of supply, African high yield has outstanding dollar issuance of $79bn, which remains well shy of other regions, such as Latin America ($368bn) and Europe ($211bn),” he says.
“There is also greater diversity, with 16 African countries represented in EM HY, more than in all the other EM regions except Latin America.”
We have also seen widespread strength across the commodities complex over the past year, such as in oil and copper, supporting many African economies.”
Turning to the political outlook, “while generalisations should be avoided, we see supportive political developments in South Africa, Kenya and Angola currently, to name a few geographies,” Holland says.
More strategically, African debt also has the benefit of being far removed from current geopolitical tensions between the US and China, according to Holland. “As the US begins to challenge its traditional partners, such as Mexico and China, African credit arguably represents a ‘place to hide,” he says.
Holland and the team are therefore overweight African debt in the fund versus its reference index, investing in both sovereign and corporate debt across the continent.
Among the bigger positions are Nigeria which is currently worth 5% of the fund, and Egypt which accounts for over 3%.
[1] According to the Financial Times article titled “African debt markets thrive as investors hunt for yield”, published on February 23 2018 https://www.ft.com/content/6e71b16a-17df-11e8-9e9c-25c814761640