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Specialist asset management firm, Silk Invest Ltd. acquired Danfonds Frontier Fund SPC., a Cayman based hedge fund, which will be renamed Silk Invest Frontier Fund SPC.


The new team will launch two Luxembourg UCITS funds, African Lions and Arab Falcons, in the first quarter of 2009. The Silk Invest Frontier Fund SPC will be relaunched in the second quarter of 2009 after finalizing the new offering memorandum and the various counterparty agreements.


Zin Bekkali, CEO of Silk Invest, comments that “the deal is a uniquely structured combination of talents that complements our new African and Middle Eastern fund platform.” Following the transaction, Daniel Broby, CEO of Danfonds, will become the Chief Investment Officer of Silk Invest.  Broby (pictured) says that the deal “is perfectly timed from an investor perspective. There is now immense opportunity in frontier markets as a result of the dramatic declines caused by the credit crisis; to which these economies are partially immune.”  Dr. Heinz Hockmann, the Chairman of Silk Invest, notes that “the synergies between the Silk African Lions Fund, the Silk Arab Falcons Fund and the Danfonds Frontier Fund were immediately obvious. Our aim was always to become the most credible frontier markets specialist. With this deal we can demonstrate to our investors, more than ever, that we have an unrivalled frontier markets team, managing a unique investment offering across different asset classes.”

The Central Bank of Nigeria (CBN) is deliberately devaluing the Naira, the theory being that dwindling demand for crude would cause it to lack the requisite foreign exchange to sustain the former rate.  Now, reports are that the CBN has “vowed to flood the financial market with dollars to and drive down the exchange rate and police the market adequately to ensure that every cent obtained is spent lawfully.”  In the last month, the naira has depreciated in the official market from N116.50 to N135.95 to the dollar.  CBN Governor, Prof. Charles Soludo, explained that the instant Naira devaluation was “deliberate and that the economy is robust enough to withstand the fall of the currency.”  In a rather brutally honest rebuttal to this policy, the national chairman of the Council of Nigeria Political Parties (CNPP), Dr. Olapade Agoro disagreed.

Analysts and fund managers expect Kenya’s Nairobi Stock Exchange (NSE) to recover in 2009 after its main index lost some 35 percent this past year.  Banking, manufacturing and retail sectors will lead the recovery, posits Maurice Opiyo, economic analyst at Old Mutual Asset Management.  Banks in particular will be helped by lower cash ratio requirements and by the low interest rate environment (allowing banks to lend more) created by the central bank in December when it cut rates despite the fact that core inflation is running at double its target.  Moreover, the nation’s banking sector “doesn’t have sophisticated products, and they don’t lend externally, so they are not exposed to any of the risks,” noted Opiyo. 

Two weeks ago reports from Lusaka warned of a “copper crisis” in Zambia, one of the world’s largest copper producers.  Since the beginning of the global credit crunch, prices for the metal, which is vital to both the electronics and buildings industries, have tumbled from record highs of nearly $9000/metric ton between 2005 and 2007, to roughly $3000/ton given both perceived and actual demand destruction.  The Mail & Guardian, a South African newspaper, reported that copper accounts for 80% of Zambia’s foreign earnings.  Earlier this year, in fact, the Zambian government projected more than $415-million in revenue from copper exports after revising mineral royalty taxes from a paltry 0.6% to the global standard of 3% and introducing a windfall tax triggered by the higher prices of copper.  That tax, however, now looks suspect, as a number of mines are cutting their workforces as revenues from foreign demand dip.  Luanshya Copper Mine (LCM) shut down its Chambishi Metals Plc unit, the country’s largest cobalt producer, and its Baluba copper mine soon after suspending a $354 million Mulyashi copper project, which had been due to start producing 60,000 tonnes of copper in 2010.  According to Reuters, the firm cited “operational difficulties arising from the global credit crunch” as reasons for the decision.

In spite of the dour headlines, some officials remains cautiously optimistic. Following the LCM shutdown, the government asked foreign mining firms to use profits that they made when copper prices were high to keep working in the downturn.  And according to Reuters, Bank of Zambia (BoZ) governor Caleb Fundanga “expressed optimism that copper prices would soon rebound,” though he admitted that” developments at LCM were a threat to the country’s copper industry.”  Moreover, in October Australia’s Equinox Minerals Ltd. announced that it signed a $80 million loan facility with Standard Chartered Bank Plc and Standard Bank to complete its Lumwana copper mine in Zambia, which recently started production.  The Lumwana mine is Africa’s largest open-pit copper mine.

Industry analysts posit that most copper mines have also slowed down expansions and upgrades following the global financial crisis.  This “supply destruction” will also lead to stagnant surpluses around the world that, once they wind down, will ultimately help right the price shift.  However, renewed growth in the industry will be dependent on a turnaround in demand (i.e., in China, the world’s largest user, where, according to Paul Harper’s excellent piece on this issue, demand for copper slowed to an estimated 9.8 percent in 2008 from 26 percent in 2007), and to that extent Fundanga said that Zambia remains optimistic that the global economy will stabilize soon and that demand for copper will begin to increase.  However, he also stressed that the government would seek to mitigate the effects of falling copper demand and prices by diversifying the economy to other sectors, such as agriculture and manufacturing of copper products.  Botswana, long dependent on diamonds, has been embracing this approach as well.

Opposition candidate John Atta Mills of the National Democratic Congress (NDC) had a narrow lead in Ghana’s presidential election run-off over Nana Akufo-Addo of the previously ruling New Patriotic Party (NPP), private broadcaster Joy FM said on Monday.  The run-off vote will decide who will be president of Africa’s newest emerging oil producer, which has already attracted much investor interest.

Per Reuters, here are some interesting facts regarding Ghana’s economy:

  • World’s No. 2 cocoa grower after neighbouring Ivory Coast, producing around one fifth of world supply. Government plans to increase output by around half to 1 million tonnes by 2010.
  • Africa’s second biggest gold miner after South Africa, with 2007 output of nearly 2.5 million ounces.
  • Britain’s Tullow Oil and private-owned Kosmos Energy plan to start producing 120,000 barrels per day (bpd) of crude oil offshore in late 2010, rising later to 250,000 bpd.
  • Economic reforms under [outgoing President John] Kufuor’s administration are credited with boosting growth and helping secure billions of dollars in debt relief.
  • Economic growth forecast at 6.5 percent for 2008, slowing to 5.8 percent in 2009/10, then accelerating to 6.8 percent by 2013, according to the IMF.
  • Annual inflation has eased since an 18.4 percent peak in June, and the cedi currency has stabilized after falling 17 percent against the dollar in the first seven months of 2008.
  • $750 million Eurobond issue in 2007 was sub-Saharan Africa’s first outside South Africa.
  • Ghana’s stock exchange is one of the top-performing markets in 2008 with the all-share index up around 60 percent, although trade is illiquid with as little as 600 cedis worth of trade in one session in October.
  • Power shortages in recent years have added to business costs, curbing mining output and forcing the closure of the VALCO aluminium smelter, which the government wants to sell.

Per The Economist, the following list highlights the projected fastest growers (in GDP growth percentages) worldwide in the coming year.  “Oil wealth explains the strong performance of the top three, and of Turkmenistan,” explains the note.  “Other commodities underpin a further five (Uzbekistan’s gold, Malawi’s uranium, Mozambique’s steel, Madagascar’s nickel, Armenia’s base metals).”  As for Georgia, “strong Western investment will help [it] recover from Russia’s territorial incursion in 2008.”

1. Qatar       13.4%

2. Angola       9.8

3. Congo (Brazzaville)       8.5

4. Malawi       8.3

5. China       8.0

5. Georgia       8.0

5. Uzbekistan       8.0

8. Madagascar       7.2

9. Mozambique       7.1

10. Turkmenistan       7.0

10. Azerbaijan       7.0

10. Armenia       7.0

Per The Economist, “the fastest growing of the larger economies in Latin America [in 2009] will once again be Peru, not least because the government will keep faith in free trade, rather than the socialism fashionable elsewhere.”  To that extent, Peru and the U.S. have implemented a free-trade agreement, one of several promoted by the U.S. to counter rival proposals by Venezuela’s President Hugo Chavez.  Nonetheless, Peru’s President Alan Garcia is suffering from a ratings slump (though he just announced a $3 billion economic stimulus plan) that some pundits attribute to such liberalized economic policies.  From The Council on Hemispheric Affairs this past October:

Despite Peru’s impressive recent economic development – 83 months of consecutive growth as of May 2008 – its civil society is becoming increasingly discontent with the leadership of Alan García. Reuters news service reported that while the country’s GDP growth rate hit 9.37 percent this year, the president’s personal approval ratings sunk to 19 percent. These ratings reflected a 16 point drop in the last four months alone, as protests and strikes over the FTA’s provisions have attracted a significant following.  On October 7th labor groups across Peru organized a nationwide strike protesting the government’s economic policies, specifically accusing them of failing to alleviate poverty. According to the BBC, thousands of protesters marched in the nation’s capital and called for García’s entire cabinet to resign. As the President continues to lose legitimacy and popular unrest surges, fewer and fewer Peruvians are accepting the notion that the global free market will increase their odds of gaining prosperity.

That said, with expected (albeit slowing) growth of 6.4%, and inflation a (relatively) low 5%, a frontier investor could do worse than parking a portion of his or her money in Peru.  Like that of Chile, Peru’s government has room to spare vis a vis public spending (i.e. credit lines and sector bailouts) given its savings of mineral revenues.  The government is also continuing with its plans to sell its first foreign bonds in almost two years to “demonstrate the economy’s strength” after receiving investment-grade ratings.  In doing so Peru would follow Mexico, which recently became the first developing nation to tap international debt markets since the global credit crisis deepened.  Peru is also seeking to establish benchmark bond yields that would help its companies sell debt abroad.  

Peru’s Lima General Index has not been spared by any means (see chart below), but the point here is that it represents a relatively attractive entry point (along with Chile) vis a vis Brazil, for example, where growth will be 2.7% in the coming year as tighter fiscal and monetary policy will squash consumer spending and curb growth.

The backbone of Peru’s economy is mining–it is the world’s largest silver miner and third-biggest copper producer (though textile, agriculture and energy related exports are also certainly vital to its continued growth).  On that front, Canada announced last week that it will spend 4 million more U.S. dollars in the next three years to help promote its mining industry’s contribution to Peru’s sustainable growth.  According to a bilateral memorandum of understanding, Canada agreed to extend the Peruvian-Canadian Cooperation Program (PERCAN) for another three years, to end on Dec. 31, 2011.  Through its Agency for International Development, Canada will increase financial support to Peru’s mining industry to 13.6 million U.S. dollars from the 9.6 million dollars originally agreed under PERCAN.  The extension of the program will strengthen Peru’s efforts to make its mining industry environment-friendly, thus contributing to the country’s sustainable growth.  “As for environmental issues, we have brought the regulations closer to meeting international standards,” said Felipe Isasi, Peru’s vice minister of mining.

Market Vectors Gulf States ETF (NYSEArca: MES) seeks to replicate, net of expenses, the Dow Jones GCC Titans 40 Index. The fund invests at least 80% of assets in securities that comprise the index. It may utilize derivative instruments and P-Notes to seek performance that corresponds to the index. The fund may invest in companies located in the following countries: Bahrain, Kuwait, Oman, Qatar, United Arab Emirates and Saudi Arabia.

Since trading at 41.44 since its launch this past summer, MES closed today at $19.28. Intuitively, this makes sense, given if nothing else the combination of the credit crisis and lower oil prices. Though as one analyst pointed out, these shocks are not all bad for the Gulf Cooperation Council (GCC):

“Cheaper oil along with a slowdown in local and international financing, could do what the region’s central bankers have so far failed to: rain in the region’s double digit inflation. The GCC countries continue to book budget surpluses as long as the price of oil does not drop below $50/ barrel.”

Over sixty percent of the fund’s holdings are in financial services and telecommunications, and in fact six of the top ten holdings (see below) are headquartered in Kuwait. In essence, therefore, you can think of MES as a way to tap Kuwait, but perhaps not much else.

Speaking of Kuwait, its exchange (KSE) has plummeted (the main index is down roughly 47% since its July 26th peak) since this summer, but headlines of late are cause for optimism. Last week the Exchange announced that the country’s Central Bank had cut the discount rate by 0.50 percent to 3.75 percent–the third cut in as many months. That said, the market went on to lose over 650 points since Dec 15th, which pundits chalked up to continued concerns over earnings of the local companies (especially in the banking and investment sectors), the slide in oil prices, and ripple effect of the ongoing global financial crisis.

On Tuesday, however, the Exchange snapped a five-day streak of unabated losses with a solid rebound, buoyed by news that Kuwait Investment Authority, the state’s investment arm, had allocated a part of its long term investment fund to invest in the local market. Per the Arab Times, the market surged 227.5 points, the biggest single day gain in 2 months, spurred by renewed buying in blue chips. National Bank of Kuwait and Wataniya paced the gainers, rallying 8.3 percent and 5.6 percent respectively. And moderate gains were also seen some of the mid and low priced stocks as well. In related news, National Bank of Kuwait state this past week that it had won the central bank approval to buy up to 40 percent in Islamic lender Boubyan Bank. The three month approval period started on Dec 22.

Another company making news is the top holding in MES, Mobile Telecommunications Company KSC (Zain), which announced last week the commencement of commercial services in Ghana with the launch of the first 3.5G network on the continent outside South Africa (Danfonds covered this story as well).  Zain Ghana’s network will offer its customers ultra high-speed internet access and for the first time in Ghana the ability to make video-calls and use rich multimedia content including sending video clips, music and pictures at the touch of a button.  With the launch, Ghana brings the number of countries in which ‘One Network’ operates to 17.

Mobile Telecommunications Company K.S.C (Kuwait) 9.34%
National Bank of Kuwait S.A.K. 8.87%
Kuwait Finance House 8.22%
Emaar Properties PJSC (UAE) 7.55%
Qatar National Bank SAQ 3.48%
Agility (Kuwait) 3.21%
DP World Ltd (UAE) 3.20%
Commercial Bank of Kuwait 3.08%
Global Investment House (Kuwait) 2.95%

Zambeef Products PLC (LSE: ZAMB), headquartered in Lusaka, engages in the production, processing, distribution, and retail of beef, chicken, eggs, milk, and dairy products in Zambia.  Its cropping operations comprise 2,700 hectares under irrigation and a further 1,500 hectares of dry land crops.  The company, through its subsidiary, Zamleather Limited, also involves in the tanning of hides for export to the Far East and Europe, as well as the production of finished leather, shoes, and industrial footwear.  It operates 82 retail outlets that sell meat, chicken, milk, eggs, and processed meat in Zambia; in-store butcheries in Shoprite supermarkets; and fast food outlets, selling fried chicken and chips. In addition, the company provides transportation services through a fleet of approximately 200 trucks; and operates as a franchise on Shoprite Checkers butcheries. 

Recently, the Times of Zambia reported that the firm will spend USD $30 million on expansion of existing projects and the initiation of new business activities in 2009, and moreover that it had recorded a turnover of K493 billion, representing an increase of 69% in Kwacha terms compared to the 2007 turnover:

Chairman Jacob Mwanza stated in the company’s 2008 annual report released to shareholders at the Zambeef annual general meeting (AGM) held at Pamodzi Hotel in Lusaka that among the upcoming projects was the establishment of a new modern stock feed plant. Dr. Mwanza stated that the group would also set up a new poultry hatchery, establish ranching operations, expand its piggery and pork processing operations, and establish the first 3,500 hectares of the planned 20,000 hectare palm plantation in Mpika. He also said that the group had continued to diversify its business in line with its diversification strategy and significant reinvestment policy, which had helped reduce the volatility of its earnings while improving the quality of earnings.

During the financial year ending on September 30, 2008, Zambeef Products Group invested in excess of K289 billion in developing, expanding and diversifying the businesses under its belt. Dr. Mwanza said that the major revenue source during the year under review was the issuance of 44 million new ordinary shares in the group, which helped to the company raise K259 billion. “This has resulted in a very well capitalised and diversified agribusiness, which is well placed to benefit from the strong real growth not only in Zambia but in the region,” he stated.

Andrew Seaman, co-manager of Stratton Street Asian Bond Fund, a fixed income hedge fund, penned an interesting column in last Monday’s Financial Times on the relative riskiness of emerging debt, vis a vis investment-grade:

Emerging market debt spreads have yet to adjust fully to the realities of weaker global growth, falling commodity prices and higher defaults. Historically, emerging market debt has traded on similar spreads to high yield as both have similar underlying credit quality. However, currently spreads on high-yield are about 1,400bp wider than emerging market spreads.

In spite of the hype in recent years, many emerging market countries have weak economic fundamentals with several countries, including Ukraine, Hungary and Pakistan, needing to request support from the IMF. At current spreads investors are not being sufficiently compensated for the risks in many of these countries.

Seaman concludes that “the time to buy high-yield credit will not be until the [global] recession has ended. Indeed, a simple strategy of buying high-grade and government bonds during recessions, and high-yield at other times, would have substantially outperformed all fixed-income sectors over the past 20 years.”


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