Africa is poised to become the “land of opportunity” for bond and equity investors should the US and China strike a trade deal, according to Bank of America.
“At a minimum, we think the removal of tariff and recession fears at least until the November 2020 US elections should lead to some restocking effect and green shoots by the first quarter,” BofA strategists David Hauner and Claudio Irigoyen said in a client note. Among the main emerging-market beneficiaries would be “some of the less loved currency and high-yield markets, the African ‘China plays’,” they said.
While many investors remain skeptical about the successful conclusion of the current round of trade talks, an agreement will become more likely as the US presidential election campaign approaches, Hauner and Irigoyen wrote. South Africa’s President Cyril Ramaphosa said in an interview with Bloomberg TV on Wednesday that a deal between the world’s two biggest economies would greatly benefit South Africa.
A trade pact would reduce the risk of a strengthening dollar, supporting emerging-market currencies and high-yield debt. Some currencies, including South Africa’s rand, would also benefit from equity inflows given that stocks are the asset class most likely to profit from an economic rebound, the strategists wrote.
“We also like Africa, where several external credits have lagged amidst the global growth concerns: Kenya, Nigeria and South Africa,” they said. In South Africa, local-currency bonds also provide an opportunity after being dragged down by concern over a rating downgrade by Moody’s Investors Service, which they say has been fully priced in.
© 2019 Bloomberg L.P.