Amid withering prospects for the rest of the continent, North Africa is attracting fund managers with its promise.
Cameron Brandt reports
As the northern hemisphere’s spring progressed, plants budded on cue but the risk appetite that bloomed among mutual investors during the second half of 1Q16 withered on the vine. Going into the final days of May, EPFR Global-tracked Emerging Markets Equity Funds recorded outflows for the seventh time in the past nine weeks while Emerging Markets Bond Funds posted consecutive weekly outflows for the first time since mid-February.
Fund groups with significant exposure to Africa were caught in the general downdraft fuelled by political uncertainty in Europe, lacklustre corporate profits and the prospect of another rate hike in the US, economic stress in major emerging markets and Japan’s experiment with negative interest rates. Africa Regional, Frontier and Middle East and Africa (MEA) Funds all experienced net redemptions six of the second quarter’s first eight weeks while outflows from the broader EMEA (Europe, Middle East and Africa) Funds hit a 24-week high in late May.
When it comes to flows between funds and Africa, those from US and European-domiciled funds have held up better than is the case with their Japanese and emerging markets counterparts.
Reflecting the general decline in risk appetite, allocations within Africa Regional Funds took a turn for the defensive at both the industry and country levels in 2Q16. Nigeria’s average weighting fell to a fresh eight-year low coming into May and managers cut their allocation for banks, rotating their exposure to food, beverage and tobacco plays.
As was true for much of 2015, the managers of diversified funds have been willing to discount some of the day-to-day issues and alarms that have sapped investor sentiment towards the continent. After dipping early in the year, South Africa’s average weighting among the Global Emerging Markets (GEM) Equity Funds has regained some of the lost ground. That, in turn, helped this market to jump several notches in EPFR Global’s latest Emerging Markets Country Selection Strategy.
Among the reasons for this more sanguine view of South Africa’s prospects among fund managers is the rebound in commodities prices as China’s latest stimulus measures kicked in late in the first quarter. Investors are also responding to this: EPFR Global-tracked Commodities Sector Funds, which saw nearly US $8 billion redeemed last year, have posted now inflows 19 of the past 21 weeks.
For investors and fund managers inclined to sell, South Africa is still generating plenty of reasons to do so. Among those reasons are double-digit food inflation, impending municipal elections, the weakness of leading indicators, the country’s slippage from second to third-largest African economy – behind Nigeria and now Egypt – and the effect higher utility costs and interest rates are having on domestic consumption.
Despite its recent elevation to the number two spot, fund managers have yet to warm to Egypt, whose average allocation among EMEA Equity Funds fell to a 17-month low in early May. The country’s key tourism sector recently suffered another blow with the still unexplained crash of EgyptAir flight 804 and a key Saudi Arabian aid package has sparked a popular backlash because of the perception it was given in exchange for two disputed islands in the Red Sea.
After turning the corner in mid-February, net year-to-date flows into EPFR Global-tracked Emerging Markets Bond Funds pushed deep into positive territory over the next two months before fading in late May. Investor preference has also shifted in favour of funds with hard rather than local currency mandates.
This pick-up in flows has been accompanied by an increase in the Africa allocations for Global and GEM Bond Funds. The latter’s exposure to Africa is close to the record high of late 1Q15 while Global Bond Fund allocations are at levels last seen in mid-1Q13. Interest from mutual fund investors, whose confidence in Africa’s bond markets was dented by revelations about Mozambique’s misuse of government guaranteed debt, remains depressed with dedicated South Africa and MEA Bond Funds seeing over 3% of their combined AUM pulled out during April and May.
At the country level, fund managers, while still sending the bulk of their Africa allocation to South Africa, are showing more interest in North African markets with Tunisia and Morocco the YTD leaders when flows are measured as a percentage of AUM.
Although Tunisia has fared better than most in the aftermath of the “Arab Spring”, its economy remains a work in progress, with investors buying into the promise of structural reform, a more independent central bank and the IMF’s involvement rather than the current lacklustre GDP growth.
Meanwhile Nigeria, which is hoping to tap the primary international market at some point this year, has seen its average GEM Bond weighting fall to a five-year low as fund managers and investors kept their distance from a market whose currency peg they expect to buckle.