The current global outlook has been punctured by three (3) themes in order of severity being the US China trade war, Brexit risks and geopolitical tensions between the US and Iran. These themes have dented growth pulse which has sent stock markets in roil, has depressed the base metal market pricing and caused volatility in the crude markets. Demand for riskier assets has risen with currencies like the Japanese Yen at highs versus the Dollar representing Asian investors while the Swiss Franc is stronger against the Dollar representing European players as gold inched above $1,500 an ounce. The dollar index against a basket of 6 major currencies DXY is at highs of 97.53 as players look for safety in assets.
Negative yields and inverted treasury curves
Yield curves in key economies such as Germany and Japan are paying negative yields while the US treasury curve has inverted for the first time in 12 years. Premiums above the 3 month US treasury bills in comparison with the 10 yr bonds have widened as the 2yr is paying more than the 10yr while the 30yr bonds have superseded to below 2% the US Federal Reserve ceiling. All these point to rising recession risks whose US index has jumped to highs. The US economy despite this is the least dirtiest t-shirt in the global laundry basket supported by stronger jobs data that keeps denting further rate cut expectations. Central Banks globally are in a central bank stimulus mode, cutting rates to create room for growth. Most look to the US Fed to effect monetary policy easing measures. Some central banks that have eased policy include US Fed that trimmed rates 25bps within the 2%-2.5% corridor, while Japan, the Philippines, India followed suit as Australia kept its benchmark unchanged.
Newly elected hard headed Borris Johnson is determined to get Britain out of the Eurozone with or without a divorce deal which has made more investors very nervous about the catastrophic effects this will yield if not executed properly. The currency Sterling valuation reflects these risks. Crude markets have also had their fair share of volatility given the geopolitical tensions between US and China sending ice Brent and WTI futures on a seesaw.
African assets default opportunity to house liquidity
Given the state of the global economy, demand for not only safer haven assets has ramped up but for riskier assets too. As yield curves turn negative and stock markets sell off heavily, investors will look to higher yielding assets such as those in emerging and frontier markets. All African assets are positively yielding given the higher risk premiums in part a reflection of the liquidity and sovereign risk postures. The appetite for yield is evident in the over-subscriptions on bond offerings such as the likes of Ghana with $24billion orders yet only $3billion was absorbed. More and more flows should be seen to channel towards jurisdictions like Egypt, Ghana, South Africa, Kenya, Uganda, Nigeria and Zambia given attractiveness of yields on both local currency and dollar denominated bonds. Despite subdued growth in most African nations, the pace is faster than in most western nations. This flow of funds is usually seen during global crises as a ‘flight to safety’ cushion as players think ‘preservation of valuation.’
This period is a very strategic period for dollar bond issuances for those seek to refinance maturing debt given they have favorable credit ratings, growth outlook and fiscal pastures. A plus for most would be for nations on and or in the process IMF programs. Bailout packages provide the requisite confidence offshores need to guarantee their investments.
So for that player searching for yield Africa is offering Kwanza bonds with dollar pegged coupons in Angola, infrastructure bonds in Kenya, Egyptian and Zambian govies in addition to Nigerian and Ghanaian paper. Africa is still the fastest growing continent.
Written by Mutisunge Zulu an Economics and Finance expert currently serving as National Secretary for the Economics Association of Zambia.
