Emerging Opportunities in Africa Capital Markets and Trade Finance

LAGOS (Capital Markets in Africa) – Africa trade finance has been neglected as an asset class, because the yields have been modest relative to African sovereign bond markets and because investors had been attracted to the high beta African investments, like the local currency bonds.

The volatility and recent sell-off in EM hard-currency and local-currency bonds in 2018 has changed investors’ appetite significantly. EM fixed income investors are changing their preference towards low beta and shorter duration investment, especially as benchmark EM funds suffered redemptions throughout May and June thus driving bond prices lower.

With growing concerns about rising US$ interest rates, elevated African sovereign debt stocks and destabilizing US-initiated trade wars, global investor risk appetite has retreated. We recommend investment in African trade finance as an ideal diversification for EM fixed income investors because it offers:-

• Low volatility, low default levels and high recovery rates
• Attractive returns that naturally adjust upwards as USD interest-rates rise
• Participation in some of the world’s fastest –growing economies
• Uncorrelated returns that have little relationship with moves in other markets
• Short duration and self -liquidating repayment schedules
• Intrinsically improved credit-risk because most transactions are secured
• An asset class with growth potential and elasticity

Finally another attraction of African trade finance as an asset class is that it offers investors the chance to invest with impact because trade finance has very positive developmental effects in Africa, particularly in supporting agriculture, financing SMEs and industry, which are the main drivers of employment growth and skills acquisition on the continent.

The African Development Bank estimates a shortfall in capital available for African trade finance of $120 billion. The withdrawal of a number of international banks as correspondent banks and providers of trade-related funding owing to increased compliance and other costs contributed to this growing trade finance gap.

GML Capital and the Eastern and Southern African Trade Development Bank (“TDB”) will be launching an investment fund this month which will provide trade finance funding to exporters and importers in Eastern and Southern Africa. It is an open-ended fund domiciled in Mauritius which seeks to deliver returns of USD LIBOR + 3-5% (after fees & expenses) to investors. Partnering with TDB will ensure high level access across the COMESA region as well as conferring on the fund preferred creditor status for a number of the investments made.

Article is written by Peter Bartlett (Partner at GML Capital LLP) and featured in INTO AFRICA August edition: Driving Africa Opportunities. Please download by clicking: INTO AFRICA PUBLICATION: AUGUST 2018 EDITION.