In the wake of recent market turbulence, offshore investors are showing a renewed interest in local currency (LCY) bonds on the secondary market, signaling a potential turnaround in sentiment.
GCB Capital, an investment advisory firm, has reported a notable uptick in offshore appetite for LCY bonds, attributing this trend to a speculative strategy of purchasing undervalued assets in anticipation of a rebound.
The shift in investor behavior is particularly significant given the prevailing market conditions characterized by depressed prices and subdued activity.
Until recently, the secondary bond market has been dominated by sell-buyback and repo transactions, which accounted for approximately 80% of market activity. This dominance has hindered effective price discovery and limited opportunities for traditional trades among investors.
However, GCB Capital’s latest report suggests a changing dynamics, with offshore investors increasingly exploring opportunities in LCY bonds. This emerging appetite reflects a growing confidence in the macroeconomic outlook and a willingness to capitalize on perceived market inefficiencies.
By strategically positioning themselves to benefit from potential price recoveries, offshore investors are signaling their belief in the resilience of local currency assets.
While the exact drivers behind this surge in offshore interest remain speculative, GCB Capital emphasizes the role of market dynamics and improving macroeconomic indicators.
As economic conditions gradually stabilize and investor confidence returns, LCY bonds are poised to attract further attention from both domestic and international investors seeking diversification and yield opportunities.
Nevertheless, GCB Capital advises caution, noting the speculative nature of offshore investor behavior and the inherent risks associated with timing the market. While buying the dip may offer short-term gains, it also exposes investors to potential losses if market conditions fail to materialize as anticipated.
Secondary Market Activity Picking Up
Trading activity in the LCY bonds is steadily improving, with investors turning over, on average, GH¢1.22 billion weekly, up from the largely dormant post-DDEP market.
The market turned over an aggregate volume of GHC22.82billion over the first two month of 2024, dominated by T-bills which accounted for almost 70% of the total volume traded.
“Two coupon payments without distress could trigger some write-backs of the sizeable impairments booked in 2022 and slowly improve valuations,” GCB Capital noted.
The Treasury completed the second cash and in-kind coupon payments on the DDEP bonds on February 20, 2024, paying the GH¢5.85billion cash coupon due investors without distress.
The payment completes the first year of debt service since the DDEP closed in February 2023, setting the tone for investors to re-assess their accounting treatment of the bonds.
Meanwhile, risks remain, but valuations expected to improve. While default risks remain pronounced amid the substantial refinancing risk in 2027 and 2028 and the sizeable single-day coupon obligations to come, GCB Capital envisaged a write-back of significant portions of these bonds in 2024, which should steadily improve valuations and stimulate activity on the secondary fixed-income market.
While uncertainties remain, GCB Capital believes the scope of the fiscal, debt and macroeconomic deterioration requires stricter fiscal discipline and expects the IMF backstop to provide ample restraint to build on the macro gains chalked thus far.
“Following the latest coupon payment and anticipated improvement in bond valuations, buying the dip could ultimately benefit fixed-income investors with a medium-to-long-term horizon,” the firm advised.
Looking ahead, the resurgence of offshore investor appetite in LCY bonds highlights the importance of monitoring global market trends and adapting investment strategies accordingly.
As economic uncertainties persist, agility and foresight will be key in capitalizing on emerging opportunities and mitigating risks in the dynamic world of fixed-income securities. By staying informed and proactive, investors can position themselves to thrive in an ever-changing financial sector.
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