Emerging markets debt managers are looking to local currency bonds issued by African governments to boost returns and increase diversification as institutional investors pour money into the asset class.
Many of these managers have been watching — or in some cases investing sporadically in — African local currency debt markets for years. But markets like Nigeria and Ghana have provided good entry points recently, rewarding investors with yields of 20%.
Fans of African debt also cite these bonds' diversification benefits: They are among the least correlated markets to global bond indexes, as are their currencies to the movements of those in major markets.
“Until October, for the past two years, we were not overly excited about sub-Saharan Africa. But now valuations have become very compelling,” said Didier Lambert, London-based executive director and lead portfolio manager for local currency emerging markets debt at J.P. Morgan Asset Management.
JPMAM managed $1.85 billion for institutional clients in local currency emerging markets bonds across all markets as of Sept. 30, up $1.1 billion from Dec. 31, according to data from eVestment Alliance LLC, Marietta, Ga. For the three years ended Sept. 30, JPMAM outperformed its J.P. Morgan Government Bond Index-Emerging Markets benchmark by an annualized 63 basis points.
JPMAM's largest investment in Africa is in Nigeria, which was included in October in the GBI-EM. Inclusion in the index sent yields in Nigerian local currency debt tumbling nearly 400 basis points to about 12%, following the Aug. 15 announcement. Mr. Lambert bought in March, when yields were at 16%, he said.
“The prospects for Nigeria are (still) quite good,” Mr. Lambert said. The stability of Nigeria's currency, the naira, “won't be challenged because they have ammunition” in the form of strong foreign exchange reserves, he said.
As a rough estimate, he expects Nigerian bonds to deliver returns of about 15%, five percentage points better than his projection for the GBI-EM. “At worst it's a compelling carry story, and at best you'll always make money on the duration,” Mr. Lambert said.
“Our favorite market in Africa is Ghana,” said L. Bryan Carter, senior vice president and portfolio manager at Acadian Asset Management LLC, Boston. “We were completely out of Ghana six months ago, but there's been a 20% depreciation of the cedi (Ghanaian currency) and there's been a (rise) in yield. Now you're getting a nominal yield of 22% with stable inflation of about 9%.”
With a possible lowering of interest rates in the next 18 months driving further compression, that could mean annual returns of 30%, Mr. Carter said.
Acadian more than doubled its AUM in local currency debt to $102 million in the nine months to Sept. 30, and its three-year annualized outperformance over the GBI-EM was 415 basis points, according to eVestment Alliance.