In brief
- Three themes were dominant over the course of the second quarter: policy response that was data dependent, debt-ceiling debacle, and commodity sell-off. Bond indices, and our IC Africa Fixed Income Fund, whipsawed in the second quarter but closed in a much-improved shape.
- Data dependency has been policymakers’ guiding principle although other undertones as was the case with the US debt ceiling debacle strengthened the hand for policy pause, even amidst historic high inflation level. China’s economic slowdown more than offset the announced OPEC+ production cut, resulting in relatively weaker global oil price in the second quarter.
- Risks somewhat faded in the quarter, with debt-restructuring progress for Ghana and Zambia under the Common Framework. The market cheered the progress as the Zambian Kwacha emerged as the region’s top performing currency (+20.8%) whereas Ghanaian Eurobonds (+18.5% average price return) had a terrific run in the second quarter.
- The return of FX orthodoxy in both Angola and Nigeria resulted in currency dislocations in those economies. Nevertheless, the point of divergence is the policy response as the former has embarked on an easing path whereas the latter is expected to maintain a hawkish bias.
- Our IC Africa Fixed Income Fund (IC AFIF) returned -2.0% YTD compared to 0.4% YTD by our relative benchmark S&P Africa US Dollar Sovereign Bond Index at the end of 1H2023. Our underperformance against the relative benchmark is partly explained by our lack of exposure in lower-rated sovereigns (below B+) such as Egypt, Ghana, Nigeria and Zambia, whose USD bonds rallied in the review period. We bought our first corporate bond exposure, which trimmed the sovereigns to 60.0%. Across sovereigns, we had our first voyage to East Africa region to expresses our conviction of the sub-region’s relatively higher growth prospects.
- The tea leaves off recent Federal Open Market Committee suggests the end of tightening bias is nigh. This should give a lift to emerging markets as they seek some form of equilibrium. Furthermore, this should be supportive of local currency positions that we are currently screening. Our cash allocation allows us some degree of tactical flexibility for some convincing opportunities during the quarter.
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