For years now, we have been searching for catalysts for the African capital markets. Over the past 24 months, our conversations with investors would finish with questions around what events needed to happen for these markets to start performing. Sure, the equity markets are cheap, but admittedly, they have been cheap for a while. And sure, the fixed income markets are yielding attractive rates, but rates have risen almost everywhere globally, so the hunt for yield isn’t what it was a few years ago.
The first quarter of 2024 has shown the first sign of green shoots in Africa ex-SA. Positive macro developments have finally started taking place, which is a positive underpin for both African equities and fixed income alike. Recently, two of Africa’s largest markets, Egypt and Nigeria, have both started to liberalise their currencies and continue with positive economic reforms.
In Egypt, the government undertook a large devaluation of the currency of 35%, with the central bank (CBE) floating the official forex rate and allowing it to converge with the parallel market rate. Around the same time, the IMF, World Bank, and EU have all reiterated their commitment and financial support.
In Nigeria, policy improvements since President Tinubu took office in late May 2023 have remained underway, with market-friendly changes to policies, such as the partial removal of the fuel subsidy, a rebound in oil production, and a gradual weakening of the currency peg. January saw the Nigerian Naira strengthen dramatically as authorities began the process of exchange rate liberalisation.
This backdrop of positive data has provided a boost to risk assets, with equity markets, high-yield credit markets, and oil prices all experiencing a strong first quarter. The Laurium Africa USD Bond UCITS Fund has rebounded 33% in USD from the lows in September 2022 to the current 31 March 2024 level. We have also seen oversubscribed primary issuances in the African Eurobond markets pick up after a lengthy post-Covid hibernation.
What we have yet to see are flows back into the African markets after many years of one-way traffic. This is starting to change as Safaricom and Equity Bank, two of the largest stocks in Kenya, are up between 50 and 65 percent in USD since the beginning of February as macro challenges were resolved and both local pension funds and large foreign investors such as Blackrock came back into the market. We sense that the initial catalyst needed to get things moving in the right direction has been signalled in the above moves.
Eye-wateringly low valuations, decent earnings growth prospects, and the continuation of necessary economic reforms are what the market has wanted to see. It is only a matter of time before the tide turns and flows come back into African markets, and when they do, prices and yields will move quickly. The upside in both African equities and fixed income is as stark as ever, and now is the time to take a closer look at these asset classes. As we like to say at Laurium: ‘Come on in, the water is warm.’
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