Metamorphosis of the global risk landscape has bred chaos that has sent financial and commodity markets into a worst rout ever in a century. However, amidst this asset sell off quagmire, Zambian Kwacha bonds and equities join the ranks of Nigerian Naira paper in demonstrating resilience and a safer haven asset option against all odds.

The drivers of resilience
Longer dated securities in Africa’s second largest copper hotspot Zambia, reported a 3% second quarterly and 13% year to date dollarized return when the rest of the world remains underwater in real terms. Rallying behind is Africa’s most populous, largest economy and top crude oil producer Nigeria with 1% second quarter and 9% year to date dollarized yields. As for equities traded on the Nigeria Stock Exchange, the crude producer reported a 10% quarterly and 20% year to date dollarized gains with red metal hotpot rallying behind at 6% second quarter and 10% year to date dollarized returns. Driving Zambia’s 2Q22 equity performance were Africa Explosives (42%) on the back of widened sentiment on copper price rally, British American Tobacco (26%) supported by effective smuggling curbs, Zambeef (27%) greater investment in crop production, Zaffico (24%) as lumber prices scale higher and Investrust Bank (20%) after a profitability turnaround following a 7-8 year losing streak. Year to date drivers for Zambia were Africa Explosives (43%), Zanaco (36%), British American Tobacco (30%), PUMA energy (27%) and Zambeef (28%). The Southern African nation continues to see growth in the banking, mining related, energy (petroleum stock) and agribusiness faculties while Nigeria’s performance was supported by petroleum stocks as global crude prices remain elevated. Homogenous across the two nations was exchange rate stability relative to their peers.

Global inflation, a hedge for asset sell off pressure
The world grapples with post pandemic inflation that has triggered the interest rate hikes which is scaling yields on treasuries higher. However, higher inflation is keeping returns on global government treasuries underwater making it unattractive for liquidity to house these assets. Real yields for Kwacha assets nonetheless remain positive both in local and foreign currency which has hedged the copper producer against flight to quality, but not for long yet as long as the rate hikes successfully ebb inflation to pre-pandemic levels in the west.

Headwinds now and ahead as copper tanks further
Delays is conclusion of bailout with the Washington based lender, the International Monetary Fund, markets are growing weary with pressure on interest rates beginning to mount but asset sell off pressure from repatriation of maturities has been effectively held by the current global inflation (> current treasury yields) posture of the world. Offshore holdings account for 33% of Zambia’s government security holdings.

Headwinds still lay ahead as the bell weather for global pulse, copper is trading at a 20 month low below the $7,500 metric ton mark sending red flags for a recessionary trajectory.

The Kwacha Arbitrageur

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