A revival of investor sentiment in sub-Saharan Africa is likely to see more sovereign debt issuance in the second half of this year. But market players have warned that global uncertainty could threaten the outlook for the region’s capital markets.
Bankers and fund managers expect a pick-up in sovereign deals to take advantage of a strong recovery in investor sentiment following rising yields and outflows during the early months of 2011.
“Earlier in the year we saw yields and bonds affected by the turmoil in North Africa and in the Cote d’Ivoire, but yields have since tightened and markets have rallied,” Belia Fofana, head of capital market solutions for Africa at Standard Chartered, told Emerging Markets. “This is testament to returning interest and risk appetite.
“We expect the pace of sovereign issues to pick up to benefit from this and for the investor community to provide a warm welcome.”
He said this trend would be led by Angola and a number of east African “single-B and double-B”-rated countries, and cited the $500 million 10-year sovereign issue by Senegal last month, which was five-times oversubscribed, as evidence of strong returning demand.
Sub-Saharan African equity markets have also recovered from sharp falls during the first three months of the year, with the FTSE JSE Africa All-Share Index rebounding from a low of 29,944.24 on 15 March to 31,578.03 on 5 June.
But analysts believe this rebound has been driven more by buoyant domestic investor demand rather than returning foreign investor sentiment.
“Foreign investors haven’t come back to African equity markets in droves to the levels we saw three or four years ago,” Stuart Culverhouse, chief economist at Exotix, told Emerging Markets.
Nevertheless, analysts acknowledge that mounting global uncertainties could have a negative impact on investor sentiment and alter this positive outlook.
“Of course we are not in a bubble. Events happening in Europe and rate hikes or expectation of rate hikes in US would certainly affect the parameters of upcoming sovereign issues,” Fofana said.
Culverhouse added that an escalation of the eurozone crisis would likely hit plans by a number of African nations to issue eurobonds and could also prevent a return of foreign investor sentiment to African equity markets.
“To the extent that the global economy slows and risk aversion means that foreign investors don’t come back to African equity markets, that caps the upside,” Culverhouse said.
In addition, investors point to the continued underdeveloped nature of African markets as likely to hold back foreign investment in fixed income and equity markets, in particular with regard to underdeveloped local currency and corporate markets.
“Allocations to Africa remain relatively small because the amount of securities is small and we have limits on the amount of exposure we can have to particular countries and bond issues,” said William Ledward, head of emerging markets fixed income at Franklin Templeton.