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Falcon Family Fund manager Jim Leitner noted a few years ago that “Ghana is a good example of the value of reading The Economist. There were a few stories about their president–(John) Kufuor–detailing his economic views and policies. He was very impressive and the upshot was that I started looking at it favorably. Leitner, as usual, was early in the trend. The Ghana Investment Promotion Centre reported a total of $460.7 million in new investments in the first quarter of the 2008 fiscal year, according to Robert Ahomka Lindsay, its Chief Executive, and the country continues to be considered one of the continent’s most economically and politically stable.
But will this be a sustainable trend that leads to long-term economic stability and viability? A recent discovery of oil off of Ghana’s western coast has some analysts wondering. Because while Kufuor trumpeted the find and declared that oil would transform Ghana’s economy into an “African tiger,” other observers wonder whether or not the discovery by London-based Tullow Oil of up to 600 million barrels last June will turn out to be a curse for the now 51-year old nation. For instance, the continent’s leading oil producer, Nigeria, has received more than $400 billion since its own oil boom began back in the early 1970’s; yet Nigeria’s Gross National Income per capita is about 25 percent lower than the average for sub-Saharan Africa. Some call it the ‘oil curse.’ “What most people don’t understand about oil is that, not only does the money not filter through to the majority of the population, but it’s much worse than that,” says Nicholas Shaxson, an oil analyst at the London-based Chatham House. “It actively makes most people poorer.”
In an unrelated, but equally interesting development, it seems that African-Americans are fueling a large chunk of Ghana’s foreign investment. Per this August 2006 piece from TIME (“Ghana’s New Money):
Ghana, a major source of human cargo during the slave trade, has been a favored destination for African Americans since it won independence from Britain in 1957. Those who make the pilgrimage often talk of an epic search for their roots and a grand narrative of Pan-Africanism. But increasingly, it’s trade, investment and entrepreneurship anchoring those high ideals. . .in African Americans, [the government sees] investment possibilities and start-up capital that [the] country badly needs. Although Ghana is in much better shape than many other African countries, its GDP is $9.4 billion, or about $420 per capita, which ranks below most Asian countries. ‘The potential for economic impact is very significant,’ says Jake Obetsebi-Lamptey, Ghana’s Minister for Tourism and Diasporan Relations. ‘As you look around now, you see the role African Americans are playing in the corporate world, as mechanical engineers, architects, doctors–right across the gamut.'”
Finally, some news last January from Ghana’s chocolate industry, as Cadbury Schweppes Plc launched an investment program to help Ghana’s cocoa farmers improve their yields, hoping to create a sustainable supply chain. Cadbury has run similar programs already in India, Indonesia and the Caribbean, and stated that its investment followed a Cadbury-commissioned report from universities in England and Ghana that showed average crop production for a Ghanaian cocoa farmer had dropped to 40 percent of its potential yield. Cadbury gets roughly 70% of its cocoa beans from Ghana, which is Africa’s second cocoa producer, behind the Ivory Coast.
Orascom is an Egyptian company involved in such activities as telecommunications, tourism and computing, and according to Max King, a strategist at Investec Asset Management, which runs a pan-African mutual fund, it is an example of the country’s diverse investment opportunities. Orascom was the first Egyptian multinational, and is one of the core Orascom Group companies, and considered among the largest and most diversified network operators. It currently services subscribers in Algeria, Pakistan, Egypt, Tunisia, Bangladesh and Zimbabwe. The company also owns Wind Telecommunicazioni, Italy’s third-largest mobile phone operator, and Wind Hellas, a Greek mobile operator. And surprisingly, up until now it has faced very little competition from the Middle East’s three largest telecommunications operators: Saudi Telecom, the UAE’s Etisalat and Kuwait’s Zain. Orascom Telecom has shared its largest market, Egypt, with only one other operator, Vodafone Egypt, since 1998, when both companies paid $516m to operate mobile phone networks using second-generation (2G) technology.
Orascom’s story started back in 1997 and its growth since then has been nothing short of remarkable. BusinessWeek wrote two years ago, for example, that its chairman and ceo, Naguib Sawiris, is “a great advocate of operating in and from emerging markets, [and] while he has had near-disasters, such as getting financially overextended in 2003, it’s hard to argue with his success so far. He has strung together a telecom empire that stretches from North Africa to Iraq to Pakistan and Bangladesh.”
Recent news stems from another planned expansion. The company announced last month plans to launch a new company this year offering banking services to its 74 million customers (mobile banking is expected to become an important revenue source for telecoms companies such as Orascom in emerging markets). Sawiris told the Financial Times that the new company would be an Orascom subsidiary offering customers the chance to use their mobiles to access banking services, including money transfer.
Mobile banking services are expected to generate an additional $1 of revenue from each subscriber every month. Sawiris says that he plans to create another Orascom subsidiary to manage operations in smaller countries, and estimated that Orascom would look at acquisitions in markets with 5 million-20 million potential customers. “Orascom Telecom enters countries to win new business,” says Wael Ziada, telecommunications analyst at an Egyptian bank EFG-Hermes. “It is not interested in piling up cash.”
Even more recent is a report stating that Orascom is eyeing new investments in Africa and Asia, and that it has already set up a new unit called Telecel Globe to evaluate investment opportunities in the region. According to Sawiris, Telecel Globe will work as a separate unit, with the mother company only supporting “its procurement power and commercial know how.” The problem in Africa, he says, is taxation and regulatory burdens, and Sawiris called on African governments to do something about it so they could “maximize the positive impact of this investment.”
Sawiris is no stranger to such challenges however, and one might even say that he thrives on them. Analysts point out, for example, that the company is historically known for establishing businesses in challenging environments. This past January, for example, it launched the first commercial mobile service in North Korea, and last December it sold 100% of its Iraq unit, Iraqna, for $1.2 billion to the above-mentioned Zain out of Kuwait. Orascom is also reportedly eyeing Cuba, following the country’s lifting on restrictions of mobile phone usage.
But the biggest future challenge for Orascom may come from within the industry. Etisalat, the UAE-based operator, has already entered the Egyptian market. Although it only launched in May, the firm has already signed up 3 million customers. Orascom’s Egyptian subsidiary, Mobinil, has responded by slashing prices, causing massive growth in the number of customers. At the end of September, Mobinil had 13.7 million customers, 69% more than a year ago. And its Algerian business could also soon face greater competition. The Algerian government plans to sell off a strategic stake in Algerie Telecom by the end of 2008. Etisalat, Zain and Qatar’s Qtel have all expressed an interest.
For more close-up analysis of Orascom, check out this article.
Okay, so Russia isn’t technically a “frontier” market. Rather, it is, and has long been, one of the preeminent emerging markets, the “R” in Goldman’s “BRIC,” the Putin (Medvedev?) lead land of oligarchs and opportunistic barons who somehow not only survived the IMF’s ill-advised ‘shock therapy,’ but then transformed the vast country into a commendable economic force that sits on more than a fifth of the world’s known reserves of natural gas and about 7% of total world oil reserves and thus basically holds Europe hostage over energy.
This article on Nestle and Russia, however, caught my eye for reasons wholly separate from energy. One trend I’m particularly interested in relates to how food companies are expanding into emerging and frontier markets. There is a huge growth opportunity in said markets, especially given changing demographics and specifically rising per capita income. One only has to look to China to see that increased wealth also means, at least to some degree, a change in diet (I’m thinking of China’s increased meat consumption). If nothing else, it means that people can afford more of the same foods, or the same foods, but of better quality.
Nestle’s executives see Russia as “its growth engine in Europe. . .suggesting [that] inflationary pressure in the country is mitigated by escalating purchasing power.” The world’s largest food company plans to increase Russian sales up to $1.9 billion in 2008, from $1.6 billion in 2007 (its worldwide sales stood at around $130 billion last year) and also to expand in the region. “Our ambition over all countries of the region is to be the engine growth for Europe for Nestle and a centre of confidence within the group,” said Bernard Meunier, head of Nestle Russia, referring to the region of Russia, Belarus and some Central Asian states.
Nestle feels that salaries and incomes in Russia are still growing faster than inflation, and that therefore consumer purchasing power has not markedly waned. But in 2007, the Russian economy grew 8.1%, leading many to conclude that it had overheated and would require wage controls to cool the economy and combat inflation. The government wants wage growth to come into line with the growth in productivity, but Russian workers have grown used to rapid income growth, as wages have grown around 10% a year in real terms since 2000. This is now causing strife among unions, and Nestle’s is no exception (see below).
Nestle has operated in Russia since 1995, but the past few years especially have seen a flurry of action. In fact, goods produced in Russia account for about 90% of Nestle sales in the country. Reports have Nestle interested in Russian ice cream companies (it is now number two in the market), acquiring a chocolate factory (it is now number one), starting to process coffee (Russians are the world leaders in consumption of instant coffee), and even opening a pet food plant.
That said, the food giant has met some resistance. This past spring, BusinessWeek reported that it was involved in “a bitter industrial dispute with its workers,” while refusing to negotiate on the issue of increasing real wages. Russia’s labor union federation threatened to strike and said that the “anti-worker” company shouldn’t be allowed to operate in Russia. “European quality, European standards, European wages,” read one of the picket signs outside Nestle’s Russia headquarters back in March, as factory workers (see protest picture) called for a 55% raise that would take the monthly wage to about 24,000 rubles ($1,014).
But Andrei Bader, head of corporate affairs at Nestle Russia, said the demand was unreasonable, considering Russian cost of living and average wages in the region, which are around 12,000 rubles. “There needs to be a balance between the quality of the labor and its cost. . .Once that balance is broken, the future of this economy loses its promise,” Bader said.
African stocks are getting noticed, according to this AP piece from Zambia, as “foreign investors [and] economic growth fire up the continent’s indexes.
The following are some of the article’s most interesting points:
- While the U. S. stock market faltered in late 2007, [Zambia’s] Lusaka Stock Exchange grew by more than 40 percent and racked up an overall market return of 102 percent, making it one of Africa’s top performing markets. Zambia’s stock exchange emerged in 1994 (with assistance from the World Bank) as part of a wave of market-opening measures that followed the country’s transition from one-party rule to multiparty democracy in 1991, and the selling of formerly state-owned businesses—including the country’s lucrative copper mines. Real growth started in 2004, thanks to high global copper prices, increasing mining investment and the cancellation of most of Zambia’s $7.2 billion foreign debt. Foreign portfolio investment increased by 57 percent from 2006 to 2007. Says Exchange boss Joseph Chikolwa, “You have to remember that Zambia came out of 30 years of socialism, so the concept of private capital wasn’t really appreciated. When the stock exchange was set up, there was about 700 known individual shareholders. Now we have well over 30,000, the majority of them Zambians.”
- Only five sub-Saharan African countries had stock markets in 1989, according to the International Monetary Fund. Now, that number has risen to 16. The Johannesburg Stock Exchange is the largest and most developed; Swaziland has the smallest, with only eight companies; and Ethiopia just opened a new commodity exchange in Addis Ababa.
- The Nigerian Stock Exchange also posted some of the highest gains in the world in 2007, as its all share index grew by almost 75 percent, propelled by banking stocks that tripled or quadrupled in just six months.
- High yields can be attributed partly to high commodity prices (especially copper, oil and uranium in resource rich countries such as Nigeria and Zambia), economic growth, debt relief initiatives and recent market-friendly economic policies. However, with the U. S. (and European) economies wobbling, American and European investment funds are taking an increased interest in Africa, buying bargain-priced shares of undiscovered companies. Foreigners are even eyeing the stock market in politically isolated Zimbabwe, should President Robert Mugabe step down.
- Most African stock markets aren’t affected by global trends, according to Joseph Rohm, a London- based vice president and analyst at investment firm T. Rowe Price International, which created an Africa and Middle East fund (TRAMX) last September. Rohm travels extensively in Africa and is particularly interested in Nigerian banks, infrastructure companies and consumer-oriented African stocks like mobile phone companies and Zambeef Products PLC, a Zambian food supplier whose stock price grew by 146 percent last year.
- Foreign investment firms still rank most African markets as “high-risk,” and to that extent Rohm says that political instability remains the top risk for investing in African markets, despite recent democratic trends. Regulation and oversight varies. Zambia, however, has its own Securities and Exchange Commission, set up with help from the World Bank and donors. Among conditions set for listing, companies have to have a history of making profits for at least three years.
This blog will focus on Zambia at some future point. In the meantime, however, those interested should check out London economist Cho’s informative blog on the country and its ever improving market conditions. I found his post on Zambian Airways, for example, to be quite informative.
I stumbled across an interesting piece by Ceri Jones entitled “The Rise And Rise Of The Continent’s Financial Markets,” which first appeared on Interactive Investors.
In light of yesterday’s post on Botswana, I felt it fairly apropos. Jones quotes Roelof Horne, an African fund manager at Investec, who reiterates the point that “a lot of negative news comes out of Africa and because it is a big continent, commentators tend to tar it all with one brush. There is this impression that Africa is struggling, but in reality it is improving rapidly every year. No matter what macro-economic numbers you look at, development is astounding. The continent no one wants to touch is growing at a rate of 6%/annum, and that is sustainable for the medium-term. Its people are naturally entrepreneurial. Everywhere I go, I am amazed at what has been achieved with so little.” Horne also makes the point that this growth is not oil dependent. Only six of 54 countries are exporters, and thus Africa’s “non-oil story is compelling,” says Horne. The numbers back him up. According to the IMF, Africa is enjoying its best period of sustained economic expansion since independence. Real GDP growth is expected to rise from 5.7% in 2006 to 6.1% this year and 6.8% in 2008.
Commodities for instance and the general increased demand in Africa’s resources, particularly from China and India, has created what Jones labels a “virtuous cycle,” whereby per capita income increases, creating increased demand for manufactured goods and thus in turn job growth and rising wages. Go down that kind of road long enough and voila–you’re on the verge of creating a bona fide middle class, still unfortunately a foreign concept to much of the continent (you still need other ingredients of course, including access to personal credit, see below). Foreign aid has also helped the cycle, as has better economic management, more openness and more stable politics. And a report last November from the World Bank concluded that promoting access to financial services in Africa should be a priority because it boosts growth and helps reduce the income gap between rich and poor. It seems people are [finally] listening.
Jones pinpoints the financial services sector (and particularly banking) as one sector where increased consumer confidence is revolutionizing the market. “Over the last three years, banks across Africa have put a huge effort into developing products for a broader market, particularly in consumer lending.” Thus, Jones writes, “as the workforce becomes creditworthy, they are eligible for bank loans to empower them.” Still, myriad roadblocks remain, and it would only be naive to assert otherwise. Economist points out that only 20% of families in Africa have bank accounts, and that small and medium-sized firms struggle to borrow. Private credit accounts for 18% of GDP in Africa—and less than 5% in Angola, Chad, Congo, Guinea Bissau and Sierra Leone—compared with 30% in South Asia. Moreover, Ethiopia, Uganda and Tanzania have less than one bank branch per 100,000 people. And opening an account in Cameroon requires $700—more than many of its people earn in a year. That said, progress is also evident. “In many countries, not only are better and more predictable monetary policies improving the environment for banking. but privatization of state-owned banks has also created opportunities, and better regulation has helped too,” the paper reported. “The improving climate has caught the attention of foreigners. The Industrial and Commercial Bank of China, in the largest ever single investment in Africa, offered $5.6 billion for a 20% stake in Standard Bank, of South Africa, which has operations in 18 African countries. [And] in 2005 Barclays, a British bank that has been working in Africa for over a century, bought a majority interest in ABSA, another South African bank.”
Jones identifies some of the biggest banks across the region as the Moroccan-listed Attijariwafa Bank (BCM), Societe Nationale Morocco D’Investissement (SNI), Banque Marocaine Com. Morocco Exterieur (BCE) and Banque Centrale Populaire (BCP) in Morocco, and First Bank Nigeria (FBNBK), Zenith Bank International (ZEN), Union Bank Nigeria (UBNBK), Intercontinental Bank (INTCON) and United Bank for Africa (UBABK), all in Nigeria. But pay particular attention to the Egyptian financial sector, she reasons, which has been “transforming itself even more than other nations, thanks to the Government’s moratorium on property ownership and a reduction in the stamp duty on property transactions to a flat rate of just 300 Egyptian pounds (then roughly $600).” With this in mind, watch National Societe Generale Egypt Bank (NTSG) and Commercial International Bank (CMIB), writes Jones.
Telecommunications, and mobile phones in particular, is another sector worth keeping tabs on. Because while few Africans have a bank account, a growing contingent have mobile phones. Economist writes that in Kenya and Botswana, for example, 17% of those who are unbanked own a mobile phone, according to the FinMark Trust, a research group seeking to make financial services more accessible. This should sound familiar. As BusinessWeek reported last November, for instance, “mobile phones are changing developing markets faster than anyone imagined. Today there are some 3 billion mobile subscriptions worldwide, and that will grow to 5 billion by 2015, when two-thirds of the people on earth will have phones, according to Finnish handset maker Nokia Corp. (NOK). Nowhere is the effect more dramatic than in Africa, where mobile technology often represents the first modern infrastructure of any kind. The 134 million citizens of Nigeria, Africa’s most populous country, had just 500,000 telephone lines in 2001 when the government began encouraging competition in telecommunications. Now Nigeria has more than 30 million cellular subscribers.” Jones writes that nearly one third of Africans have a mobile phone (over 300 million people), a remarkable statistic when one considers that only roughly 4% of the continent’s population even has access to a landline! Mobiles in and of themselves have a tremendous effect on emerging economies, and especially in Africa, by providing everything from banking (e-commerce) to more efficient communications about weather and impending crop yields. “A growing body of evidence suggests that access to communications boosts incomes and makes local economies far more efficient,” according to BusinessWeek. And Economist writes that “mobile phones have improved poor people’s lives tremendously, providing political news and health-care information in remote areas to fueling commerce.”
Jones reports that “three of the most liquid operators in the [mobile phone] segment are all Egyptian-based: Telecom Egypt (TELE), Vodafone Egypt (VOD) and Mobinil-Egyptian Company for Mobile Servcies (EMPN).” And “companies that are riding the boom [vis a vis the building of new infrastructure to support upward mobile demand] include West Africa Portland Cement (WAPCO) in Nigeria and El Ezz Aldekhela Steel (ALFS), Suez Cement Egypt (SZCT) and Egyptian Iron and Steel Company (EISC) in Egypt.
Personally, if it’s an African telecom that you’re after, I’d look no further than South Africa’s MTN (quick disclosure, I have no position…yet), the biggest operator in Africa (number seven, by the way, in this unofficial ‘fastest growing African telecoms’ list). The company had been seemingly on the verge of being bought by Bharti Airtel, the largest mobile-phone operator in India, a deal that Economist noted “would unite the leading companies in the world’s two most promising mobile markets,” while adding that “in neither market have penetration rates yet exceeded a third of the population. India is adding more subscribers per month than any other country. In Africa, subscriptions are projected to grow by 11% a year until 2011, according to Gartner, a research firm.”
However, that deal was called off this past weekend. Pundits now believe that Bharti’s domestic rival, Reliance Communications, is the new frontrunner to land MTN. At stake? 68m customers in 21 African and Middle Eastern markets. But it is a vital market, especially if continued social and economic progress across the continent is to be realized. Mobile phones have improved poor people’s lives tremendously, from providing political news and health-care information in remote areas to fueling commerce. They are the ultimate ‘leapfrog’ technology, so to speak, and frontier investors should be mindful of the impact they will continue to have as per capita income continues to increase and new subscribers continue to come.
Investors keen on tapping some of Africa’s commodity driven and still surging markets could do far worse than Botswana, which is ranked 2nd (out of 40) in the latest “Economic Freedom” rankings, and 1st in terms of least amount of corruption by Transparency International
In 2007 three of the seven African equity exchanges followed by Bloomberg were at all-time highs, including Botswana’s, whose Domestic Company Index had then risen from 1752 back in 2001 to 8462 (today it stands around 6917). Overall, the Botswana Stock Exchange has 35 listings spread across three indices. Nonetheless, many investors remain (perhaps rightfully) weary. After all, The World Bank estimated in 2005 that real income per head in the 48 countries of sub-Saharan Africa since 1960 rose on average by only 25%. Compare that to East Asia, where real income rose 34 times faster. But the typical basket of reasons to steer clear of Africa as a whole (political upheaval, corruption, poor infrastructure, etc.), argues Nicholas Vardy, Managing Director of Hayek Capital Management, “mean that the firms that do succeed are some of the savviest around.” Moreover, Vardy says, “thanks to the ‘Africa discount,’ indiginous African companies trade at half the levels of the Western counterparts.” Kathryn Cooper, Money editor of the Times UK, writes that one reason for Botswana surging markets has been the increase in the BRICs’ wealth. “Indian companies such as Sitel India seeking cheaper sites for their call centres, just as Western companies outsourced to India,” she states, citing Lars Kalbreier at Credit Suisse.
Vis a vis Botswana, the mineral sector in particular has seen fabulous increases in investment during the past two years. Botswana’s economy expanded by 6,2% in the fiscal year to June 2007, while average inflation slowed to 7.1%, with growth being widely attributed to both the mining and the nonmining sectors. According to Loni Prinsloo of Mining Weekly, “Botswana has experienced a serious resurgence of mining activity in the country over the last couple of years, with more discoveries announced almost every month.” And earlier this year, Frinsloo writes, “the Botswana Minister of Finance and Development Planning, Baledzi Gaolathe, stated that the minerals sector of the country was flourishing, while adding that ‘exploration for a wide variety of minerals is active and several new minerals projects were launched during last year.’” Tourism is also an increasingly important industry in Botswana, accounting for almost 12% of GDP. To that extent, Botswana’s tourism industry received three prizes at INDABA 2008, Africa’s largest trade and travel show. A good play on this industry is the exchange listed Chobe Holdings Limited (CHOBE), which recently further increased its footprint in the tourism sector by acquiring Ker and Downey Botswana and The Bookings Company.
Dale Baker, a private client portfolio manager and a former U.S. diplomat with extensive experience in both Europe and Africa, also provided some testament to Botswana’s potential in an article for Motley Fool in early 2007:
“My trip to Africa last year included a stop in Gaborone, Botswana–my first assignment as a diplomat in 1988. Back then, Gaborone was a sleepy desert capital city with one decrepit movie theater, a couple of bars and restaurants, a few grocery stores, and one decent hotel. But Botswana is one of the world’s largest diamond producers, and the politicians are, mercifully, not corrupt. Botswana obviously had a lot of potential; famous international investor Jim Rogers invested heavily in the tiny Botswana stock market in the 1990s and made out like a bandit as the economy took off.
I had not been to Gaborone in 16 years. While the basic road layout is the same, the city is now jammed with shopping malls, hotels, banks, and much of the same commercial infrastructure you find in big South African cities. A city that used to have one four-way- stop intersection, which really confused the rural drivers, now had rush-hour traffic jams. I barely recognized the place. Imagine living in a quaint cottage, selling it to a new owner, and coming back to find it knocked down and a McMansion in its place.
Many South African companies mentioned above operate in Botswana now. To invest in Botswana’s diamond trade, Anglo-American’s (AAUK) De Beers subsidiary partners with local interests in a 50-50 joint venture, Debswana.”
If all you knew about Kazakhstan stemmed from “Borat,” you’d likely be skeptical about the country’s growing status as an emerging, frontier market. After all, the only thing the movie’s protagonist seemed truly proud of concerning his homeland was his older sister Natalya’s status as “number four best prostitute.” Charming. But now, writes Bruce Pannier, “more than a decade and a half after the Soviet Union collapsed, Kazakhstan is emerging as a regional power in at least several areas. The money from its oil industry, just now starting to produce in large quantities, gives Astana the kind of revenues that its Central Asian neighbors can hardly imagine. Its banks are among the region’s pioneers in tapping foreign stock markets. [And] Kazakhstan is also investing in other countries in Europe and Asia, but also closer to home in Kyrgyzstan and Tajikistan, where Kazakh companies own shares in banks and various industries.” Thus, while Kazakhstan still needs and solicits large-scale FDI for its own needs, including transport, pipelines and energy infrastructure, the Central Asian nation has started buying into foreign energy-related ventures.
“Borat” jokes aside, many experts echo Pannier’s words and now describe the sprawling country as one of the most mature economies in Central Asia, and a stable nuclear partner. In fact, Greg Vojack, a managing partner with law firm Bracewell & Giuliani in Kazakhstan, opined that Kazakh companies are “coming of age and expanding globally.” The key to the relatively sudden boom thus far can be summed up neatly: Uranium. Kazakhstan contains the world’s second-largest uranium reserves, estimated at 1.5 million tons, and is the world’s No. 3 uranium miner, exceeded only by Australia and Canada (the three countries account for more than half of global uranium production). In 2006, uranium production increased 21 percent, and in 2007 that rate accelerated over 30 percent to roughly 7,000 tons, according to the country’s Energy and Mineral Resources Ministry. Most analysts now predict that Kazakhstan will soon become as vital a contributor to the global uranium market as it is in oil. And while uranium prices have increased over 1,000 percent since 2001 to over $100 a pound (specifically, demand and extended weather-related closures at key uranium mines in Australia and Canada tripled uranium prices in the past year to about $120 a pound), there is not necessarily any immediate ceiling. Australia’s Macquarie Bank’s stock-broking division, for example, projects that by 2009 uranium prices will rise to $200 a pound. Driving uranium prices upward are record-high oil prices and rising demand for the fuel, particularly from Asia. South Korea relies on nuclear energy to produce 45 percent of the country’s electricity, and Japan is not far behind, relying on nuclear power for 30 percent of its energy needs.
China and India are also quite keen on nuclear energy. China’s Commission of Science Technology and Industry for National Defense has stated that China will “prospect for and develop indigenous uranium deposits in order to expand the nation’s ability to produce 40 gigawatts of nuclear power electrical generating capacity by 2020.” China is also developing a national uranium reserve to commence in 2010. A UPI wire story from August 2007 noted as well that “nuclear power accounts for just 1.4 percent of China’s electrical power generation,” and that “despite Beijing’s ambitious attempts to expand uranium production in Xinjiang and elsewhere, local sources will be insufficient to meet domestic needs; analysts predict that within less than a decade China’s planned nuclear power reactors will consume 44 million pounds of uranium annually, as more than 16 provinces, regions and municipalities have announced intentions to build nuclear power plants within the next eight years–a total of 77 planned and proposed new reactors.” As for India, nuclear power accounts for roughly 3-4 percent of the country’s power needs, and the government has 19 planned and proposed nuclear power reactors.
In 2002, Kazakhstan became the first of the former Soviet states to receive investment-level credit rating, and has been courting foreign investment ever since, especially in regards to mining. The world’s leading producer of uranium oxide, Canada’s Cameco, has a 60-percent share in Kazakhstan’s Inkai uranium mining operation, while the state run energy firm, Kazatomprom, the world’s fourth-largest producer, also has a stake in Inkai. Founded in 1997, Kazatomprom reported assets of $1.6 billion in 2006, and last year announced plans to increase its uranium output sixfold to 18,000 tons per year by 2012.
Kazakhstan has also done a commendable job of keeping the great big bear (Russia) at bay. ” As with its oil and gas reserves,” the UPI noted, “Kazakhstan has adroitly maneuvered to lessen its dependency on Russia by diversifying its partners and markets.” Specifically, in April 2005 South Korea and Kazakhstan established a joint mining venture for uranium, (with operations set to commence this year) with an projected annual output of 1,000 tons. And one year later Kazakhstan and Japan signed a civil nuclear cooperation agreement under which Japan was to import 30 percent of annual uranium needs of 9,500 tons for power generation from Kazakhstan. Other foreign companies investing in Kazakhstan’s uranium industry include Canada’s SXR Uranium One Inc., Japan’s Marubeni Corp., China’s Guangdong Nuclear Power Group, Britain’s New Power Systems Ltd. and the U.S. uranium trading company Nukem. These deals are “a way to shore up partners other than Russia for [Kazakhstan] nuclear-related industry,” observes Vojack.
How to play Kazakhstan from the comforts of your own home? How about with what Winston Kotzan describes as “the Borat trade”?
It is fairly well accepted that the term “frontier markets” was first used when Standard and Poor’s began to track a frontier market index back in 1996. But the phrase/concept gained wider viability in October 2007 when S&P actually launched the first investable index, the Select Frontier Index, which features 30 of the largest companies from 9 countries, per the breakdown pictured above, as well as the Extended Frontier Index, listing 150 companies from 27 countries. Soon after, MSCI Barra launched its own frontier market index (see chart below), which follows 19 countries. And back in March, Merrill Lynch Global Research rolled out its own Frontier Index, covering 50 of the largest and most-traded companies from 17 countries in Asia, Africa, Europe and the Middle East.
The index includes companies from countries like Nigeria, Cyprus, Kazakhstan, United Arab Emirates and Morocco. Stocks eligible for inclusion have a minimum market capitalization of $500 million, a minimum three-month average daily turnover of $750,000, and also a foreign ownership limit of more than 15%. The three most important sectors in the Merrill Lynch Frontier Index provide some insight as to what is driving the development and growth of frontier markets. Banks are the largest sector at nearly 40% of the index, while financial services companies are the next-largest at roughly 26% of the index. Oil and gas firms are 13.6% of the index.
What initially spurred frontier fever? S&P analysts analysts noted that frontier market economies were growing at a “brisk pace since 2000”. Per the shown graph (right), since 2000 the average real gross domestic product (GDP) growth in frontier markets increased at an annualized rate of 5.6%, outpacing the growth of both emerging and developed markets. However, in one sense the high growth rates may only underscore how poor these markets truly were (and to a large extent still are), rather than any marked, long term improvement or liberalization in their market conditions per se (the GDP per capita of much of the developed world is roughly $37,500, compared with just $1,845 for frontier markets and $2,390 for emerging markets, for example).
Finally, in 2005 a paper published at Goldman Sachs went one step further, breaking the frontier market down into the countries most likely to follow in the path of the mighty BRIC economies. Their top candidates, which they dubbed “the Next 11” (see chart below), include Egypt, Pakistan, Vietnam, Turkey and Iran.
Vis a vis the hopelessly stalled Colombia Free Trade Agreement (FTA), Democrats in Congress still hold their collective noses at Colombia’s appalling human rights record (though some would argue that any high ground the U.S. had on that issue was regrettably thrown away, circa 2001), as well as the claim that Colombia’s government is hostile to labor unions (citing union members’ deaths at the hands of paramilitaries as evidence). Furthermore, before even considering the deal, Democrats would like Congress to first pass legislation to help those here who would lose their jobs because of “shifting patterns of trade.” In the meantime, Colombia remains a class divided country (the gap between the rich and the poor in Colombia is one of the biggest in Latin America, with the top one-fifth of the population retaining 60% of the national income, according to the World Bank) of 44 million, now in ‘trade limbo.’
The United States for years has regularly renewed its preferential tariffs on nearly all Colombian exports, and in 2006 Colombia agreed to drop its barriers to American goods, as well, in exchange for the arrangement being made permanent (hoping, in turn, that said deal would create a new wave of inward flowing capital). Now, that arrangement looks doomed, and with it could go the political fortunes of its leader, Álvaro Uribe, who is in his second term and who has been considered over the years to be a staunch ally of the U.S. in the fight against the drugs and terrorism trades which have constantly threatened to engulf the poor country.
This is an issue to keep an eye on in terms of guaging investors’ future sentiments towards the nation as a whole. Back in February, Ben Laidler, a strategist at JPMorgan Chase, stated that Colombian equities “could positively surprise” in 2008, and that “key catalysts would be the lifting of capital controls, as well as strong economic growth, attractive stock valuations, the low level of foreign participation in the equity market and the recent listing of state oil company Ecopetrol.” But what kind of growth would follow in the event that the FTA falls through? Critics of the Democrats’ alleged politically driven protectionism argue that Uribe should ignore the petty interests of US politics, and negotiate actively other trade liberalization agreements with the European Union and the Pacific rim. But losing the U.S. would surely takes its toll, especially in light of other economic factors weighing against it.
Free trade aside, to many, Colombia (and pretty much all of Latin America) has never looked riper. Interest-rate cuts in the U.S. have prompted a number of investors there to buy higher-yielding Latin American shares and bonds (although fears of inflation are increasing, and Colombia’s central bank, along with Chile’s, missed its inflation target). The lawlessness and drug trafficking that has forever been associated with the country was somewhat tempered by Uribe and a tough security policy that greatly weakened Colombia’s left-wing FARC guerrillas who once ruled the countrysides with relative ease. “The fundamental backdrop has improved significantly in recent years, driven by a dramatic turnaround in the country’s security situation and the center-right reformist presidency of Alvaro Uribe, the most popular major leader in the region,” Laidler said.
However, cynics wonder how entangled the government still is with rogue groups. “Paramilitaries” were created in the 1980s by wealthy ranchers to protect themselves from FARC attacks. But over time, and especially in light of FARC’s waning power, said groups have turned into defacto warlords, accused of killing thousands in the name of drug trafficking and money laundering. They also may have deep-rooted political ties. In 2006 a senior paramilitary leader boasted after the 2006 election that a third of Congress’ members were elected with his movement’s backing. And last month Mario Uribe, the president’s cousin and close political ally, was arrested for his allaged paramilitary links. Yet Uribe seems genuinely keen on a nationwide crackdown, especially after the recent announcement of th extradition to the U.S. of 14 of Colombia’s most sought after paramilitary warlords on drug trafficking charges. But, goes the counterargument, might this have been only to hush up the men with the most information about illicit-government links, as well as to get in good graces with U.S. Democrats?
Back to the numbers. Colombia’s economy grew by about 7% last year and is expected to grow by 5.5% this year, although unemployment is still around 11.5%. Its top three exports are oil, coffee and coal; other exports include nickel, emeralds, apparel, bananas and cut flowers. One primary concern to investors should be its sparse capital flows. According to fund tracker EPFR Global, during the best month of 2007, inflows totaled $34 million, while during the worst month outflows were $15 million. In comparison, regional neighbors, like Brazil, receive hundreds of millions of dollars of foreign inflows. One glaring problem was that in May 2007, as unproductive capital flows caused the artificial appreciation of the Peso and put pressure on some exports, the government imposed a 40% non-remunerated, six-month deposit requirement on all short-term foreign inflows. For example, Geoffrey Dennis, an equity strategist at Citigroup, reiterates that capital controls drag down Colombia’s equity market, but states that “their removal could catalyze equities to outperform.” Also hurting the local market, he says, are rising fiscal and current account deficits, and unattractive equity valuations. And “once capital controls are lifted, we would focus on growth stocks, such as beneficiaries of infrastructure spending,” Dennis stated. However, it’s questionable whether or not this policy change will ever happen, especially given the government’s well founded concerns over inflation.
Despite the red flags, Laider has specific plays in mind for those interested in the present. After all, the IGBC Index–the benchmark index of Bogotá’s (pictured) Bolsa de Valores that holds rapidly growing components such as Bancolombia and Chocolates–has surged nearly fourteen fold since its October 2001 low. The three biggest and most liquid stocks, he says, are the aforementioned Bancolombia (CIB), the country’s largest bank and Colombia’s only level three ADR, as well as Ecopetrol and Suramericana, a conglomerate with stakes in the insurance, social security, finance, cement, food, retail and textile sectors.
Interesting quote from Franklin Templeton’s Mark Mobius, which I found over on Controlled Greed from January 5, 2007.
“Mobius says his Emerging Markets Small Cap Fund will place greater emphasis on the relatively small companies in more established emerging markets like Taiwan or Malaysia, rather than on the bigger stocks in frontier markets. ‘Frontier is good if the stocks are cheap and overlooked,’ he says. ‘Otherwise, you’re better off in the bigger emerging markets. A lot of these (frontier) markets have been picked over, and their prices have already gone up. Very little money going into frontier markets can drive prices up quickly.'”
Contrast that with the sentiments of Christian Deseglise, HSBC’s global head of emerging markets, who said back in January that “as mainstream emerging markets move to become high-income economies, it [only] makes sense to look at countries that are still in an embryonic stage of development.”
JGW
Frontier Markets 