Africa’s emerging commercial real estate markets may look tempting from the outside, but will remain the preserve of those with the highest appetite for risk.

Even the CEO of Growthpoint, South Africa’s largest listed property firm, feels the continent (excluding South Africa) is not for the faint-hearted.

“We’re sceptical with those African countries further north. Nigeria, Uganda, Kenya, Rwanda etc … you’re never sure if the law protects your property rights. The law around property title is certainly nowhere near as advanced as you would get in South Africa.”

But others are more optimistic. Knight Franks’ head of Africa Peter Welborn told a Reuters Summit in June that Africa opportunities were just as good if not better than other emerging markets such as Asia and Latin America, promising hefty returns.

Growthpoint is the landlord for some 440 commercial properties in South Africa, but owns just two buildings in the rest of the continent, in neighbouring Namibia.

“We’re not unhappy with our properties in Namibia, but we’re not necessarily long-term holders,” Sasse says, adding those were inherited as part of Growthpoint’s past portfolio purchases. Instead, the company is casting its net much further afield to Australia, where he says its new property unit could spend A$2 billion on acquisitions over the next two years.

If you had bought emerging market stocks exactly at the top of the bubble and sold them exactly at the bottom of the crash, you would have suffered a lot of pain (and probably shouldn’t be in the investment business in the first place).  The loss would have been 67 percent of your principal.

Most people won’t have lost that much, of course, depending on when they bought and sold. But even if an investor did buy exactly at the top, as long as they held on their losses by now would have been pared back considerably. 

The graphic above, created by Scott Barber, shows how much of the crash has been clawed back. The full column represents the maximum loss; the green shows the amount recovered. In points terms, 50 percent of the emerging markets crash losses have been recouped.

 Other markets have not fared as well. How did you do? 

Direct and indirect foreign investors fled from Africa as the credit crisis sparked a flight to safety, or at least familiarity, but Ayo Salami, manager of the Duet Victoire Africa Index fund believes domestic demand can step in to underpin growth.

By any standard the second quarter of 2009 was remarkable. Here are some numbers to chew over as the third quarter gets under way:   

— World stocks as measured by the MSCI All-Country World Index had their best quarter since the benchmark was first compiled in 1988.

    — The world index gained 21.2 percent for the second quarter. Its nearest “competitor” was the fourth quarter of 1998 when it rose 20.66 percent.

    — Much of the index’s gain this quarter came in the first two months. The index was essentially flat in June as investors began trading in a tight range.

    — Emerging markets were the main driver. MSCI’s sub-index for the sector gained 34.3 percent for the quarter, also a record high. Asian shares have been among the stars, with the MSCI Asia-Pacific ex-Japan index rising 33.7 percent. This was more than twice the gain on the U.S. Standard & Poor’s 500 index.

    — A big decliner was volatility. The Chicago Board Options Exchange Volatility Index, often called Wall Street’s fear gauge, fell below 30 percent at the end of the quarter to its lowest level since before the collapse of Lehman Brothers.

    — Over the quarter the VIX has lost 40.3 percent, reflecting growing confidence among investors that equities have ended the tumble of the past year or so.

    — One of the biggest percentage gainers was oil. New York crude gained around 42.2 percent on expected demand from a recovering world economy. Other commodities also made strong gains, with copper up 23.4 percent.

    — Hopes for a global recovery and rising concerns about future inflation — linked to the oil price surge and super-easy credit policy — pushed government bond yields and mortgage rates higher. Ten-year U.S. Treasury yields jumped 87 basis points over the quarter to 3.54 percent, having topped 4 percent at one point in early June. Ten-year euro zone government yields ended the quarter 39 basis points higher at 3.38 percent.

    — A growing appetite for higher-yields boosted demand for emerging market debt. Emerging sovereign debt spreads narrowed 212 basis over U.S Treasuries according to JPMorgan.

    — Investors ended the quarter clearly committed to future gains in higher-yielding assets. Reuters asset allocation polls for June showed cash reserves at a 23-month low, a sign that money was being put to work. EPFR Gobal data showed that about $130 billion has exited safe-haven money market funds in the year to date, but that is still less than a third of the $455 billion of cash that flocked to those funds in 2008 as a whole.

(Reuters photo: Gary Hershorn)

Five things to think about this week:

STALLING RALLY
- The global equity market rally has stalled in June and is threatening to go into reverse. With this week effectively the last full week of the second quarter, the temptation for many funds to book profits on such a lucrative quarter will be high. Any knock on boost to volatility would pose more risks for some of the trades that looked the most attractive in a lower volatility environment, such as cyclical versus defensives plays, emerging markets, and foreign exchange carry trades.

POLICY, SUPPLY RISKS FOR BONDS
- How the U.S. Federal Reserve will respond to the interest rate market gyrations of the past month has been a key market talking point. Questions centre on whether it will expand the size of buybacks, whether there will be any change in the length of time the buyback programme lasts, whether the central bank makes any effort to unwind the rise in bond yields seen in the past months, and whether there will be any talk of an exit strategy. Another risk to the front end will be the Treasury refinancing, which resumes after a week of no supply and will be concentrating on the shorter end.

WHAT COLOUR ARE THE SHOOTS
- This week’s data will show both whether the inventory rebuilding that was priced in over recent months is actually materialising and whether there are any other drivers of economic activity out there. The flash PMI in Europe and sentiment indicators will be particularly relevant in deciding on the latter issue, with consumer and income data out from both sides of the Atlantic providing an additional window on how domestic demand is shaping up.

CENTRAL BANK CASH
- There is potential for significant take up at the ECB’s first one-year tender this week and some are speculating that the injection of large amounts of money into the market could drive down short end rates sharply. Most recent anecdotal evidence suggests firms are still facing tight credit conditions but confidence in financial stabilisation is a pre-requisite if banks are to lend on. This is leading to speculation of where else the money might be parked in the interest rate or fixed income universe. There are also question marks over whether any of the money might leak outside the euro zone — and what, if any, are the potential FX implications of such seepage.

EMERGING MARKET RISKS
- Higher volatility spells underperformance in the emerging market universe and has raised questions over the risks in individual countries — e.g. Turkey’s IMF deal; Latvia’s political difficulties in winning acceptance for budget cuts; the possibility of the Iranian domestic upheaval gaining market attention; and ructions within the Saudi banking sector. The shifting sentiment suggests potential hurdles for heavy third quarter corporate and government refinancing needs, especially in central and eastern Europe, not least given that the heavy issuance plans of better-rated developed market sovereigns pose crowding out risks.

People packing their bags and flying out to St Petersburg, Warsaw, and Prague this summer may not just be seeking an exotic vacation spot.

International property investors are inching back to emerging Europe, lured by prospects of higher returns in markets such as Poland, whose economy has held up relatively well in a global downturn, and Russia, which is bolstered by rising crude oil prices.

After posting strong growth for over 5 years, commercial real estate investments in emerging Europe had been a washout after Lehman Brothers’ collapse in Sept ‘08, with first quarter sales hitting a record low.

As our Moscow-based property reporter Yuliya Komleva and I wrote , major property fund managers such as Germany’s DekaBank, UK’s Aberdeen, and Hines from the United States have again looking for big buys in the region, although Hungary, Ukraine and the Baltics remain largely no-go zones.

Aberdeen Property Investors’ managing director for Russia, Charles Voss, even compared Russian cities favourably against London, where the once-booming UK financial services industry has been weakened by the global financial crisis.

"They don't anticipate all those jobs to come back immediately so the demand for office space will be weak (in the UK). Even though they are starting to get to the bottom, the growth curve in terms of additional value can be less than what can be in found Russia," says Voss, who sits in Russia’s cultural and historical capital of St Petersburg.

With property prices diving and driving up yields in London however, investors are looking to squeeze higher returns in emerging Europe, says Jones Lang LaSalle (JLL) head of CEE Capital Markets & Investment Tomasz Trzoslo.

(This JLL graphic illustrates European office yield movement in the past year)

“If you can buy in London for 6-7 percent, why buy in Central Europe? Central Europe needs to trade at a yield premium—my guess about 150-200 basis points,” Warsaw-based Trzoslo argues.

Five things to think about this week:

EYE ON CENTRAL BANKS
-  Investors will be on the lookout for any further signals on quantitative easing when the European Central Bank and the Bank of England announce their decisions on Thursday. Analysts see the ECB leaving rates on hold but pushing ahead with and possibly extending a plan to buy up to 60 billion euros in covered bonds. The focus will also be on growth forecasts for the next year and the message they send about the pace of any recovery.

COMMODITIES SUPERCYCLE, CYCLICAL SURGE
- Oil prices are nearly double their four-year low set in December and the Baltic Dry Index, which tracks rates to ship dry commodities, has risen more than 300 percent since the start of the year. Coupled with a weakening dollar, investors might be bracing for the return of the supercycle in commodities. The resultant inflationary pressures could push investors away from government bonds and into the arms of equities.

EMERGING DISCONNECT
- High-yielding emerging market currencies remain weak, weighed down by poor domestic growth prospects even as emerging equities rise along with their developed market peers, buoyed by hopes of a global economic recovery. The disconnect is likely to persist with governments, particularly in emerging Europe, looking likely to lower interest rates further.

IN SEARCH OF MORE POSITIVE DATA
- Green shoots have been popping up at an encouraging rate, with consumer confidence and home sales data in the United States, and improved Euro zone economic sentiment being the latest signs that a downturn may not be as steep as many originally feared. The week provides more key tests for this hypothesis: U.S. non-farm payrolls, core personal consumption expenditure, factory orders and ISM data.

TREASURY YIELDS
- A sharp rise in Treasury yields driven by worries over a record U.S. budget deficit has pushed the yield curve to its steepest on record, and Treasuries yielded more than euro zone government bonds for the first time in seven months. While surging yields could threaten the equities rally as businesses and consumers fret about increased borrowing costs, auctions attracted strong buying from foreign central banks, putting a floor under the dollar.

(Reuters photo: Laszlo Balogh)

MacroScope is pleased to post the following from guest blogger Peter Attard Montalto. Peter is emerging market economist at Nomura International and here outlines why he is cautiously constructive on the issue of sovereign risk in South Africa.

Recent events in South Africa have sent some conflicting signals to investors about sovereign risks. On the one hand there was some regulatory flip-flopping over the Vodacom listing given objections from the union organisation COSATU, which raised questions about the influence of unions in Jacob Zuma’s administration. On the other hand the sovereign issuing some $1.5 billion was highly successful and oversubscribed.

With Zuma recently elected on a platform of change for his domestic audience and continuation of old policies when speaking to investors, there is a raft of new ministers and new ministries and quite a bit of policy uncertainty. No foreign investor will deny South Africa’s need to address serious social problems of inequality, housing, jobs and education through a more developmental state agenda. However investors I speak to simply want to see that this is not at the expense of the productive sectors of the economy.

This agenda will naturally involve the ANC’s allies: COSATU and SACP (communist party).  As such, the process of governing will be a noisy affair for investors. I put the Vodacom incident down to such noise.

However I believe the new Zuma administration will find itself heavily constrained by the need to raise funds for its agenda and so keep investors onside as the government’s borrowing requirement balloons. Add state owned enterprises engaging in very necessary investment, and a current account deficit and you arrive at a funding requirement north of  500 billion rand for the next two years.

This will act as a strong rationalising influence though a backup overdraft in the form of an IMF flexible credit lending facility would be a benefit.  It also should not be forgotten that there is still a strong business influence in the cabinet and the ANC from the likes of Cyril Ramaphosa and Tokyo Sexwale.  Most investors buy the case of policy not shifting sharply to the left, though a lot of questions have been planted in the minds of investors.

Keeping the different factions in his cabinet in line will be key for Zuma’s success, especially with two new hurdles looming: the Bharti/MTN and the Xstrata/Anglo American mergers. Both are sensitive and likely to be jumped on by unions.  The inflation-targeting debate is also being reopened locally -- a topic foreign investors love to discuss.

It is now up to Zuma and his team to deliver on prudent macro-policy as well as his developmental state priorities in order to sustain the current goodwill from investors.  It is still early days for his administration. We hope not to be disappointed -- for South Africa’s sake as much as anyone elses.

Five things to think about this week:

VALUATIONS
- The MSCI world stocks index has rebounded 37 percent since March, the VIX fear gauge has hit its lowest level since September 2008, and positive earnings surprises in Europe are marginally outstripping negative ones. But there are serious questions over the equity market’s ability to sustain its rise.

MACRO SIGNALS
- Trade data from the U.S., Canada and the UK, all out in this week, will be combed for signs of any recovery in global commerce. Also due are flash GDP data from the euro zone, industry output for the U.S., France, Italy, the euro zone and the UK, and Japan machinery orders.  
  
QUANTITATIVE EASING
- The ECB has finally shown willingness to deploy unconventional easing measures but it’s hard to judge the success of such steps. Narrowing credit spreads, stock markets’ bounce and gains in emerging market assets all show efforts to restore confidence in the financial system are having an effect. But if getting and keeping bond yields down is the yardstick for success, it’s unfortunate that 10-year UK and U.S. government bond yields are back up to levels seen before the announcement of quantitative easing in those countries. And diminishing returns on further balance sheet expansion raise questions over how much more money central banks can print before inflation fears start to preoccupy policymakers and markets.
  
COMMODITIES
- Confusion over the reasons for the commodities rally has reduced the usefulness of commodities prices as indicators of the industrial outlook. An apparent economic recovery in China has helped to boost the CRB commodities index by 21 percent from February’s lows. But how much does the rise reflect a change in supply/demand for commodities, and how much is it simply due to idle money flooding back to unstable markets? Similarly, why has spot gold remained strong above $900 as jitters over the financial system decrease? Gold could be reflecting expectations that recovering economies will boost physical demand for the metal, but it may also be responding to fears of currency debasement after central banks’ radical monetary easing.

EMERGING MARKETS 
- Rising commodity prices and an easing dollar have offered a perfect environment to re-enter emerging markets. The coming week’s  EBRD meeting will focus attention on central and eastern Europe and how it is coping with a nasty period of refinancing (albeit less dire than the IMF initially estimated).

Ministers from Iraq, from prime minister Nuri al-Maliki down, are in London on Thursday to attract investment into the country. Could Iraq be one of the few investment regions decoupled from the global economic cycle?

It was having a war while the rest of the world was enjoying economic boom. As well as signs of lessening violence now and the promised withdrawal of U.S. combat troops by August 2010, it does have oil.

The country has a $2.7 billion bond maturing in 2028, has written off much of its debt with the Paris Club and others, and is planning government bonds totalling $5 billion.

As one fund manager told me: “Iraq is a less correlated asset, it doesn’t have much debt and its bond is holding up reasonably well.” But he still added, “the political risk is the thing that makes Iraq stand out negatively from other credits”.