African markets: exciting times
• We remain bullish on global growth and are relatively comfortable with the major risks to this scenario from US consumer deleveraging, funding problems for European sovereigns and monetary tightening in China.
• We expect EM growth outperformance to attract investment and we see frontier markets catching up with broader EM as the search for yield increases and the memories of the illiquidity during the 2008 financial crisis diminish.
• EM currencies are expected to continue outperforming G4 currencies, even though our expectation for EUR/USD downside in coming months may limit gains against the USD.
• We expect to see higher commodity prices, with the influence of higher food and fuel prices fostering supplyside inflation pressure globally and more so in economies where food is still a large portion of consumption.
• Higher inflation is likely to foster monetary tightening via both higher rates and stronger currencies creating an interesting backdrop for carry trades. We like carry trades in NGN, GHS, EGP and even MZN and AOA, albeit that access is limited. We would also be buyers of UGX post late-Feb elections.
• With the exception of Nigeria where we have seen a massive back-up in yields to attractive levels, we would be unwinding duration generally across Africa’s local curves and especially in Kenya.
• Africa’s macro equity story remains strong and we continue to expect solid upside multi-month returns, with Nigeria expected to be the outperformer.
• Africa’s sovereign Eurobonds returns will be undermined by a likely back-up in US Treasury yields. We see limited value in Gabon 17s, we are neutral on Ghana 17s and see some value in Senegal 14s. After some further downside, we believe Côte d’Ivoire 32s will be the best performing sovereign Eurobond in 2011.