Traders patiently watching the zloty’s climb against the dollar in 2009 have fairly good evidence of an imminent reverse trend. A glance at the five-year chart shows that USD/PLN has now twice bounced off some fairly important support levels. Furthermore, intuitively the breakdown makes sense. Per a Bloomberg report today, Ulrich Leuchtmann, head of foreign- exchange research at Commerzbank in Frankfurt, opined that currencies in eastern Europe were starting to come under pressure. “It’s a natural correction from the very upbeat sentiment that we saw recently. From a fundamental point of view such a quick recovery didn’t make much sense,” he said. Thanks to JB3 over at Xtrends, by the way, for pointing out this setup.
John Legat, the Harare-based CEO of Imara Asset Management, noted this spring in regards to the “dollarization” of Zimbabwe that it had been “extraordinary how quickly consumption has started to increase, and with it volumes and capacity utilization.” Zimbabwe has used the U.S. dollar as one of several multiple foreign currencies (notably South Africa’s rand) since January, in order to temper the hyperinflation which left the Zimbabwe dollar nearly worthless last fall. Inflation since the new currency regime has averaged around 2% through June; the last inflation figure announced before the country’s adoption of foreign currencies was last October, when prices were soaring at record 231 million percent.
A late June conference in the capitol attracted 40 overseas fund managers eager to capitalize on the increased investment that dollarization has realized. “Until recently, international owners had significant constraints on repatriating their Zimbabwe profits and did not consolidate these assets on their balance sheets,” noted Imara CEO Mark Tunmer. “This all changes in a dollarized economy. Following the global banking crisis, many companies are keen to show that their balance sheets are not over-leveraged. The ability to reflect ‘forgotten’ Zimbabwean assets could be most helpful in this environment.” Investors keen on Zimbabwe may also be pleasantly surprised by many firms’ current production capacity and potential for growth, according to Imare’s Sean Gammon. “A lot of plant in our corporate sector is relatively modern and well maintained. Many of our larger companies invested in new plant in the 1990s. It provides a robust base for operations as the country makes a new start, while any new investment would add significantly to productive capacity,” he said.
Legat, for one, points to the SAB Miller-owned Delta, Zimbabwe’s largest brewer, as an example of a firm that can expect a boost from increased consumption and more efficient (up to 4x) capacity utilization which will help the company eventually meet rising demand. “Volumes in the full year to March 2010 are expected to be about the same level as in 2005, before the big recent slide in consumption,” he theorized.
That said, some critics allege that without a continuous stream of foreign aid, Zimbabwe’s dollarization experiment is likely doomed to fail, since the federal budget can no longer be financed through domestic means, and foreign currency “vouchers” being used to pay civil servants in particular are not widely accepted by retailers or banks. Some local politicians, in fact, are already calling for “de-dollarization” (though their motives/ideological allegiances are questionable). Yet such talk is likely just that. Zimbabwe will not return to using its own currency in the near future, and any move back to the Zimbabwe dollar will be linked to export strength, Zimbabwe’s finance minister Tendai Biti emphatically said on this week.
Imara Holdings, the Botswana-listed, Pan-African investment bank and asset management group, recently launched a niche fund focused on small-to-medium-sized mining and other companies that often remain unnoticed by global funds that typically allocate resources towards more prominent resource firms. Imara, which among other vehicles offers a Zimbabwe Fund, a Nigeria Fund, an East Africa Fund, and a long-only Opportunities Fund that covers a range of countries and sectors, has $135 million in assets under management, and $750m under administration.
The timing of the fund, whose commodity exposure includes gold, platinum group metals, coal, ferrous metals, chrome oil and gas, could hardly be more ideal, explains its manager Bruce Williamson, who has 25 years of experience as a mining analyst. Williamson argues that the year’s commodity rebound is more secular, rather than cyclical based. [Commodities are] not a temporary phenomenon. The long-term fundamentals are strongly positive. [And] the big, long-term upside is among juniors and mid-tier miners,” he explained.
A Dow Jones report published last week quoted Standard & Poor’s Financial Services as theorizing that the $700 billion global Islamic finance industry would “weather the financial crisis” and moreover would resume its growth on the support of “high demand for Shariah-compliant products, which are considered less risky than conventional debt.” While the global issuance of sukuk fell 35% to $5.3 billion in Q2 compared with last year, a 164% surge in volume in this year’s second quarter compared to the first signaled renewed and robust interest, according to analysts. In fact, Standard Chartered Bank’s CEO of Islamic banking predicts a primary market of “close to $10 billion” by year’s end. The biggest sukuk issuers YTD have been Malaysia and Indonesia, followed by Bahrain and Saudi Arabia, the largest Middle East economy.
Facilitating sukuk’s global growth will be certain legal changes (i.e., tax system overhauls) currently under advisement in countries such as France, Hong Kong, Kenya and Nigeria to assist the introduction of Islamic financial products, which includes not only sukuk but also Murabaha (cost-plus-financing), which is used primarily in commodity finance. According to French authorities, such “tax neutrality” laws will put Islamic products on equal footing with similar, more conventional products, and thus promote equitable tax treatment while boosting their commercial viability.
For example, under new law, a financier’s taxable profit from the deferment of payment granted to the purchaser under Murabaha would be spread evenly throughout the period during which payment is deferred. And in the case where said financier does not reside in France, but his customer is a French national, the profit in question would be exempt from the French withholding tax. And K.C. Chan, secretary for financial services and the Treasury, Hong Kong government, noted earlier this year that changes would be made such that Islamic-derived profits would be made exempt. Hitherto, Hong Kong didn’t impose tax on interest payments, but taxed profits earned, putting Islamic bonds at a disadvantage. Chan added that Hong Kong sees itself as a “gateway for Islamic finance to opportunities in mainland China and other countries in the region including Taiwan, Korea, Vietnam, Laos and Kampuchea.”
An anonymous fund manager weighed in today with his (or her?) “trading picks” vis a vis Nigeria’s All Share Index, which rallied 35% in Q2 after a 37% plunge in Q1 that caused it to be labeled the ‘world’s worst performing market’ at the time. The index remains down roughly 15% YTD, however. New additions to, and current holdings in the manager’s portfolio include:
- Access Bank: A “high-growth story”; well capitalized, undervalued and “an aggressive management team that has proven itself adaptable to current market challenges.”
- BCC: A top pick in the construction and real estate sector due to “its widening market opportunity, new installed capacity and significant likely earnings-growth momentum in 2009.”
- Continental Reinsurance: A stock that has been “excessively trampled” over the past three months (down 53% to a record low) yet still maintains “an attractive valuation.”
- Diamond Bank: The second-tier player with a middle market and SME focus is “one of the new niche players in the Nigerian banking space,” whose management is “highly regarded.”
- Ecobank Transnational Incorporated: A “significantly misunderstood and mispriced [stock] by the market,” ETI is a “uniquely pan-African bank with 91% of its SSA profits coming from outside Nigeria [that] operates in 27 countries with over 11,000 employees from 29 countries across Africa.”
- GT Bank: A “strong franchise with a focus on blue-chip corporates and a reputation built on high operating standards,” GT Bank is “the only bank in our universe to publish under international financial reporting standards (IFRS).”
- Guinness Nigeria: Nigeria’s second-largest brewer is a “niche brand with solid margins (EBITDA +30%) and a growing market opportunity.”
- Oando: The largest downstream petroleum marketer in Nigeria has “a portfolio of lucrative upstream oil and gas assets that are increasingly becoming a larger part of its revenue mix significantly enhancing its margins.”
- Standard Alliance Insurance: Potentially “strong premium income growth underlined by a robust direct sales network.” Because it is trading at a “significant discount” (approximately 60%) to its adjusted book value, “its forthcoming results could be a solid catalyst.”
- UBA: For a retail bank in an underdeveloped market, UBA has an extensive network in Nigeria as well as 80 branches in 10 other African countries.
Interesting piece on Bloomberg about how rising frontier markets may indeed signal the death knell for the 2Q global equity rally. Much like a pendulum moving out and then back, the rally may be peaking along with the recent rise by illiquid assets. Think of equities alone as having their own ‘risk curve’; that is to say, the further out on the curve you go, the riskier the asset, and presumably the higher the potential yield. Greater market liquidity at any given time will generally correlate with further movement on the curve. So as green shoots sprouted this spring and into the summer, and as the VIX begin to wilt, investors’ thirst for something a little further out on the curve has been increasingly hard to quench.
MSCI’s frontier index has risen 21% since April 30, including its best month ever in May, while the emerging market index is up 17%. Vietnam’s VN Index led the surge, jumping 34% since the end of April on the heels of a meaty government stimulus. Sri Lanka’s Colombo All-Share Index’s climbed 32% in that same period. But the theory among some analysts now, however, is that this trend will begin to unwind. “Markets that have had the largest moves to the upside recently will be susceptible again to very strong sell-offs,” remarked Beat Lenherr, chief global strategist at the Singapore-based LGT Capital Management. The frontier index trades at 11x profit, for instance, right around what it was showing last September before caving in. And both developing market indices are down over 5% since mid-June, signaling a peak has already been formed.
According to its Assistant Chief Executive for Business Development and Government Relations Barrak al-Subeih, Zain’s possible decision to sell its African operations would be made in order to “look for expansion opportunities in other areas with higher growth rates, such as the Middle East or the Far East.” Hitherto, the Kuwait telecom firm has spent upwards of US$12 billion in Africa since 2005 (when it purchased Celtel International), including roughly $3b in Nigeria alone, the continent’s most populous nation, while continuing to expand and operate in 23 countries across the Middle East and Africa. Per Bloomberg, Zain has around 40.1 million subscribers in Africa, a figure that constitutes nearly 62% of its client base. Additionally, more than half of its $7.4 billion of annual sales in 2008 came from Africa.
The strategy of chasing higher growth rates is not without concern, however. A study published last year by Booz & Company, a global management consultancy, concluded that most markets in the GCC were quickly reaching “saturation levels”. Further growth, it noted, would thus have to adopt strategies that address both the scale and scope of their services. In terms of scope and growing revenues, operators must extend and diversify their business to include offerings that go beyond basic telecom services. “As for extending scale, operators must acquire and/or pursue strategic alliances, either with local or international players, to create a much sought-after critical mass,” remarked Ghassan Hasbani, a Booz VP. And as for scope, he continued, operators must extend and diversify their business to include offerings that go beyond basic telecom services.
Yet as of late, at least, Zain has shown a propensity for both. Two months ago it expanded its scale in West Bank and Gaza (a region with a paltry 35% penetration rate) through a 56% ownership stake in Paltel. And several weeks ago the company announced the implementation of ZAP–a new service allowing customers to make cross-border payments and transfers between Kenya, Tanzania and Uganda with no extra charge.
Saudi Arabia’s Tadawul All-Share Index (TASI) has posted impressive returns YTD (up over 16%), but last week’s correction, coupled with a recent report issued by Riyadh-based Samba Bank–which warned that the recovery of oil prices to above $60/barrel and a forecasted 24% increase in government spending will not be adequate to offset a sharp slowdown in private sector activity–raises concern.
The Bank asserted that while public spending in both oil and non-oil sectors has been robust, private investment, in contrast, remained tepid, constrained by lingering tougher lending standards due at least in part to poor export prospects, especially in petrochemicals (polyethylene prices are still down roughly 50% from their mid-2008 highs) and refined products, the country’s main exports after oil and natural gas. It added that the country’s GDP would contract by 1.2% in 2009 (following 4.5% growth last year), but predicted that growth would climb to 4.4% in 2010.
Additional observations included the perceived “oversupply” in the commercial real estate market, such as the government’s pet King Abdullah Economic City north of Jeddah on the Red Sea, which the Bank projects will have trouble attracting additional-needed financing.
Differing projections emerged this week on the future fate of Kenya’s shilling, which has risen of late against the dollar thanks to heavy dollar selling from offshore accounts and healthy interest in Kenyan government bonds from foreign buyers. On Friday the shilling traded 76.85/77.15 against the dollar after several weeks mired in a monotonous 77.50-78.50 band.
According to Absa Capital, a South African investment bank, Kenya’s shilling–which has already lost nearly 20% of its value over the past year–will be under “continued pressure…due to lower receipts, including exports and remittances” in 2009. Moreover, because Kenya is a net importer, its balance of payments can thus also be expected to further decline.
However, per Kenya’s CFC Stanbic Bank, the currency “is expected to strengthen against the dollar for the rest of this half-year, lifted by the recovery of the global economy [and thus export recovery], sluggish dollar demand at home and earnings from tourism.” That said, analysts there admit that the Central Bank of Kenya (CBK) “could stem any gains if it continues soaking up foreign exchange from the market to shore up its official reserves.” Reserves are still below the four months import cover that the bank is meant to maintain. Yet the shilling “could strengthen towards 75.00 against the dollar,” if the CBK steered clear of the market, opined one trader.
According to Joel Toujas-Bernat, the International Monetary Fund’s (IMF) Tunisian mission chief, Tunisia maintains a “relatively favorable position” to address the financial crisis. In addition to the government’s historically “cautious” monetary policy, which created a buffer zone for public finances, Toujas-Bernat cited an anticipated “good performance” in agriculture and energy as the underpinning for the country’s projected 3% growth rate this year. Though the country’s export markets in particular have been affected by the crisis, he continued, “the political openness of the economy”, which has realized improvements in both productivity and competitiveness, has helped made Tunisian companies “more robust” and thus better equipped to withstand the economic shock.
