Business Maverick

Investors Gorge on African Bonds, But They’re Dodging Its Stocks

By Bloomberg 18 July 2019
Employees work at a computer terminal on the trading floor at the Nigerian Stock Exchange (NSE) in Lagos, Nigeria, on Tuesday, April 2, 2019. The International Monetary Fund said Nigeria’s economy was growing too slowly to reduce poverty or joblessness and urged the government to boost revenue and scrap its system of multiple exchange rates. Photographer: Ruth McDowell/Bloomberg

African local bonds are on a tear as investors flock to riskier assets. But the continent’s stocks are missing out, despite being much cheaper than their emerging-market peers.

The AFMI Bloomberg African Bond Index, which groups the local-currency debt of eight nations including South Africa, Nigeria, Egypt and Ghana, has gained 6.3% in dollar terms since the start of May, around the time a dovish tilt by major central banks caused a surge in the amount of negative-yielding securities. It’s bettered the 4% advance of developing-nation local bonds overall.
Africa's local bonds are outperforming stocks

Carry traders have been particularly attracted to Africa. Egyptian-pound bonds, which yield 16%, have made total returns of almost 8% over that period, extending their gain this year to 25%. South Africa’s debt is up 6.9% since the end of April and Nigeria’s 4.7%.

But what’s good for bond traders isn’t necessarily so for equity investors. While the former focus more on the short term, looking for high interest rates and stable currencies, the latter want economic growth. Aside from Egypt, the fastest-growing country in the Arab world, Africa’s major economies aren’t providing much of it. South Africa’s output contracted the most in a decade in the first quarter, while Nigeria’s economy has been anemic since a crash in oil prices five years ago.

South African stocks have slumped 1.6% in local currency terms since April, though a rally in the rand means they’re up slightly in dollars. Elsewhere on the continent, investors aren’t being attracted by low valuations. Excluding South Africa, African stocks trade at a forward price-to-earnings ratio of barely 9, based on estimates for the next 12 months. Emerging- and frontier-market equities each trade at around 12.

Low valuations aren't enough for investors to buy African stocks

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