As risk appetite claws back into the global and local markets, Emerging Market- EM asset demand is rallying. Increased stimulus packages by global central banks led by the US Federal reserve and other key regulators such as the Bank of England, Peoples Bank of China and European Central Banks have seen increased liquidity globally leading to fund managers search for yield. The current global landscape reveals increased inflation which continues to make yields in the west, unattractive. As such this has coincided with economic recovery expectations after intensified vaccine efforts to curb the spread of COVID19, a systematic global health care issue that remains the worlds top risk after climate change. This has pointed asset managers and other market players to EM and Frontier market assets such as local currency bonds.
One such attractive destination for liquidity has been Zambia, Africa’s second largest copper hotspot. Despite grappling with debt restructure, weakening currency brewing cost push inflation after a series of coupon defaults on its dollar bonds, Kwacha sovereign bonds remain fairly priced relative to Consumer Price Index – CPI.
Read also: BOZ raises 2-yards in bond sale as investor sentiment on Zambia beams
The Zambian local currency bonds index is up 51.0% over 12 months and year to date performance reveals a 23.2% rally in Kwacha terms while in dollar terms the S&P index is 22.9% over a one year period as year to date reveals 15.1% rebound surpassing the global S&P500 index dollar returns. See below S&P Zambia Sovereign Bond Indexes in local and foreign currency denomination
“The copper producers sovereign asset market has continued to take a cue from cash flush markets with funds seeking yield as they house on emerging market assets”
From lows of 104.5 in April 2020 when the copper producer was severely hit by pandemic related stresses that amplified fiscal vulnerabilities, the S&P Zambia bond index (USD) has rallied 25.5% to 18-month highs of 141.33 successfully shrugging off losses induced by the corona virus pandemic.
“Confidence boost has to some extent sourced from progressive talks with the IMF and rising copper prices”
BONDS REMAIN WINNERS IN ZAMBIAN ASSET MARKET
Zambia has been one of the fortunate sovereigns to attract investor flows in 1H21 given the recent sentiment boosts locally from progressive talks with the Washington based lender, the International Monetary Fund – IMF for bailout, rising copper prices which entail an improvement in the proceeds from mining taxes. This has in – turn changed the inflation and exchange rate view earlier forecast at the genesis of the year. Global de-carbonisation efforts have propelled copper prices higher whose projection extends to highs of $15,000 – $20,000/MT in the next decade as the lithium powered electric car era reigns.
A lithium powered electric car manufactured by Tesla. Global de-carbonisation efforts have continued to fuel higher red metal prices whose trajectory is expected to peak levels of $20,000/MT in the next decade
Global sentiment has played a part through stimulus packages that have resulted in ultra thin interest rates and inflation spirals making treasuries unattractive havens. Despite double digit inflation and more recently recorded at 23.2% (May) bond yields have remained above CPI within the range of 30-33% whose premiums above inflation remain positive. The dollar S&P ZMW index has outperformed the S&P500 US index.
The S&P Zambia Sovereign Bond Index tracks the performance of local currency denominated sovereign debt publicly issued by the government of Zambia in its domestic market.
The Kwacha Arbitrageur