BlueOrchard Brief: Why supranational organisations from Africa currently offer potential

06/05/2022 Blog

We see currently volatility and dispersion in the market for emerging market bonds. These involve the specific valuation of individual issuers on the one hand and of the market segment as a whole on the other. In this article, Evariste Verchere, Senior Portfolio Manager at BlueOrchard, and Florence Birkett, Portfolio Manager at BlueOrchard, explains why they believes supranational organisations from Africa currently have potential.

Challenging environment, driven by various factors

We are currently experiencing a challenging environment, driven by various factors such as rising interest rates, increasing geopolitical risks, and growing inflationary pressures. We believe that while these challenges involve a high degree of risk and volatility, they also lead to a greater dispersion between issuers and bonds and, accordingly, to investment opportunities.

The selection of individual securities is more important than ever in this environment. We therefore avoid issuers with high leverage, because we think these will probably be the ones that are most affected by rising interest rates.

African supranational organizations bonds particularly interesting

There are big challenges in ongoing geopolitical risks of a monetary mistake of the Federal Reserve. In this context, bonds issued by supranational organizations from Africa that are solidly financed and have good access to capital appear particularly interesting. We believe that these bonds currently offer attractive investment potential compared to their European counterparts. The lack of a broad investor base for these issuers is the main reason for the attractive valuations, as this limits the demand for these bonds.

Furthermore, in developed markets, issuers of high-yield bonds are usually rated with high-yield credit ratings according to their high debt profiles. In emerging markets, this is not necessarily the case. There are many possible reasons why a company could have a high yield issuer rating. For example, a company with solid fundamentals that sits in a country with a high-interest rate rating is likely to be very often constrained by the credit rating of its home country. A good example is IHS Holding—a high-yield rated transmission tower operator headquartered in Nigeria with operations in several emerging markets. Despite good fundamentals, the company is negatively impacted by Nigeria’s B- rating, resulting in only a valuation of B+. Given this, it is possible to find attractive opportunities in emerging markets without compromising on fundamentals.

 

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For further information, please contact:
Tahmina Theis
+41 44 441 55 50
tahmina.theis@blueorchard.com

 

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