Regional Asset Class Strategy

The South African rand looks precarious and will likely move to ZAR11.0000/US$ in the near term.

  • We are increasingly positive towards Ugandan local debt, and will consider initiating a key view in our asset class strategy table.

  • We see little value in Sub-Saharan African eurobonds due to an increasing mismatch between low yields and often shaky fundamentals. Even so, new issuances by Kenya, Angola, and Côte d'Ivoire will likely be well-received.

  • Ups And Downs
    SSA - BMI Q1 2014 Currency Forecast, Appreciation/Depreciation %
    • The South African rand looks precarious and will likely move to ZAR11.0000/US$ in the near term.

    • We are increasingly positive towards Ugandan local debt, and will consider initiating a key view in our asset class strategy table.

    • We see little value in Sub-Saharan African eurobonds due to an increasing mismatch between low yields and often shaky fundamentals. Even so, new issuances by Kenya, Angola, and Côte d'Ivoire will likely be well-received.

    • The improving economic situation in Mauritius is boosting the country's stock market, and we maintain our bullish view on the SEMDEX. We believe that Kenyan and Nigerian stocks are also promising, but we are waiting for an attractive entry point before taking a firm view on either.

    Currencies - Mixed Bag

    BMI recently summarised our views on SSA currencies, examining how we expect them to affected by weak commodity prices and the potential of tighter US monetary policy ( See ' Market Strategy - Which Currencies Are Most Vulnerable?', January 10). The results were mixed, but our view on the South African Rand is the most pessimistic; we expect the currency to depreciate by 4.4% over the first quarter of 2014.

    Ups And Downs
    SSA - BMI Q1 2014 Currency Forecast, Appreciation/Depreciation %

    While other currencies are unlikely to see this sort of swing, we stress that many look increasingly fragile. Nigeria faces the replacement of its well respected central bank governor just as pressure is rising on the naira (see 'CBN Succession Creates Uncertainty For Monetary Policy', January 13 and 'Pressure Continues To Build On External Account's, January 6).

    Local Debt - Out of Kenya, Considering Uganda

    We have closed our bullish Kenyan local debt view following the maturation of the 3-month Treasury bill issued on October 16 2013. The view ended with a total return (currency and carry) of 0.99%, but we decided not to roll over our position due to our view that currency fluctuations will limit further gains.

    Ugandan short-term local debt could offer more for foreign investors from a carry perspective due to strong currency stability and relatively tight monetary policy. The Ugandan shilling has been remarkably steady in recent quarters and we expect this trend to continue over the near term. Yields on Ugandan 91-day treasuries were 9.80% at the latest auction on December 31 and should remain reasonably supported over the coming months (see 'Still Positive On Local Debt For Now', January 13).

    Eurobonds - Window Closing, Some Will Still Slip Through

    Although we believe that yields on SSA Eurobonds are unattractive and lower than fundamentals can justify, we maintain that current market conditions and bullish sentiment will see interest in forthcoming bond issuances remain high. We stress, however, that the eventual end of extraordinarily loose monetary policy in developed markets will inevitably bring this period of ultra-low SSA Eurobond yields to an end. We believe that this window is already beginning to close (see 'Regional Eurobond Strategy' December 18 2013).

    Kenya Sitting Pretty
    SSA Eurobonds - Soverign Risk Ratings And Spread Over US Treasuries, bps

    We expect that Kenya, therefore, is one of the last wave of SSA states to benefit from ultra-low yields. The country is scheduled to issue its first international bond, which will have a face value of between US$1bn and US$2bn, in early 2013. BMI predicts that high liquidity, combined with Kenya's large economy and relatively high profile among investors will keep demand high. We anticipate yields of between 6% and 7%, comparable to those on similarly rated African debt.

    Equities - Island Optimism, Caution On The Mainland

    Our bullish view on the Mauritian Semdex has gained 5.16% since initiation on October 30, and we believe that there are further gains to be had. The index looks good technically, with a recent bullish break through previous all-time highs, set in May 2011, and we are also positive towards it due to attractive political and macroeconomic fundamentals.

    Lift-Off Acheived
    Mauritius - SEMDEX

    We are adopting a wait-and-see approach to the equity markets of Kenya and Nigeria. Nigeria's All Share Index exceeded expectations by breaking through key resistance at 40,000 on December 31 2013, but BMI suspects that this move may have been the fleeting result of improved global risk appetite. We will wait to see if the rally shows signs of being longer-lived.

    In Kenya we maintain our view that the equities market will benefit from a strong economy, powered by consumer-focused stocks in banking and telecoms. We are holding off initiating a key view on the Nairobi Securities Exchange All Share Index, however, due to our belief that a raft of positive earnings statements have already been priced in.

    We believe that the performance of the Zimbabwe Industrial index in 2014 will depend on the policy environment, and that the index could be highly volatile over the coming year. The heavily-weighted banking sector is facing a rising tide of non-performing loans, while there are growing worries that the government will re-introduce a domestic currency. A new currency would likely stoke high inflation, causing foreigners to flee the market but prompting domestic investors to buy equities as a store of value.

    BMI Sub-Saharan Africa Asset Class Strategy
    DATE INITIATED ENTRY LEVEL GAIN/(LOSS) RATIONALE
    CURRENCIES
    Bearish GHS vs US$ 30/11/2011 1.6655 40.8% Widening trade deficit and lack of local confidence.
    EQUITIES
    Bullish Mauritian Semdex 30/10/2013 2,025 5.16% Improving economic growth, strong outlook for banking sector and promising technicals.
    Source: Bloomberg, BMI

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