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Turbulence continued in Botswana following Moody’s downgrade of sovereign debt last week from stable to negative. The ratings service projected a prolonged decline in demand for diamonds and thus continued pressure on the state’s coffers. Botswana will run a deficit of 12.2 percent of GDP in 2010/11, per its Finance Minister Kenneth Matambo. To that extent, the firm warned that “the government’s ratings would likely be downgraded to A3 upon the failure to stem the deterioration in its net asset position over the medium term,” and that “fiscal consolidation and economic diversification will be ever more vital to preserve the country’s economic strength as the depletion of diamond resources approaches over the coming decades.”
Diamonds once accounted for over $3b (roughly 50%) of annual revenue for the country, with the U.S. and Japan demanding the lion’s share of product. While analysts predict the demand for luxury goods will be restored (though likely aided by an increase in demand from emerging countries rather than a complete bounceback from developed ones), the recovery will take time. Furthermore, Botswana’s government admits that its gem production capabilities may only have another ten years or so of viability. In the meantime, the government is looking to diversify its economy while concurrently attempting to realize growth. Its central bank left benchmark rates unchanged, stating that its four interest-rate cuts last year were adequate to spur economic growth and that forward-looking inflationary pressures were benign.
According to Bruce Powers, a Dubai-based technical analyst and financial commentator, “it seems like investors have now distinguished between Dubai’s problems and [those of] Abu Dhabi.”
On a relative basis the Abu Dhabi Securities Exchange General Index (ADI) has been showing strength compared with the Dubai Financial Market General Index (DFMGI). That strength is likely to continue into the foreseeable future barring conclusion of Dubai’s debt restructuring. Although there are similarities in the chart patterns of each market, the ADI has broken through its downtrend line resistance level while the DFMGI remains below it.
Herd-caused contagion afflicted the perception of risks for assets across the Gulf last fall on worries about possible Dubai-related defaults, as well as questions over the emirate’s vision for its long-term financing. At their peak, even credit default swaps for five-years bonds jumped 177 basis points for Abu Dhabi, and 119 for Qatar, respectively, despite no apparent concern per se over the strength or volatility of their cash flows. Analysts noted, for instance, that Qatar has the world’s second largest gas reserves, and oil-rich Abu Dhabi has the biggest sovereign wealth fund, worth approximately $700bn.
Per its recent news release, “(EGPT) is the 24th ETF offered under Van Eck’s Market Vectors brand and joins the firm’s growing international equity lineup, which includes Market Vectors ETFs focused on Africa (AFK), Brazil Small-Cap (BRF), the Gulf States (MES), Indonesia (IDX), Poland (PLND), Russia (RSX) and Vietnam (VNM). Van Eck also offers hard assets, specialty and fixed income ETFs and, as of the end of 2009, was the sixth largest ETF provider in the U.S. with over $12.0 billion in ETF assets under management.”
The fund will roughly track the Market Vectors Egypt Index and its ten largest holdings at present include: Commercial International Bank 8.6%, Orascom Construction Industries 7.9%, Orascom Telecom Holding SAE 7.6%, Egyptian Financial Group-Hermes Holding 6.3%, Egyptian Kuwaiti Holding Co 5.9%, Talaat Moustafa Group 5.5%, Egyptian Co for Mobile Services 5.3%, Elswedy Cables Holding Co 5.29%, Al Ezz Steel Rebars SAE 5.0%, and Telecom Egypt 4.8%. As one observer noted, EGPT’s underlying index consists of 28 companies and has 5.47% dividend yield, meaning that even after subtracting the expense ratio (capped at 0.94%), the fund may be able to generate a dividend yield in excess of 4%.
Egypt’s EGX30 Index has been Africa’s best performer YTD, rising nearly 12%, and there are a plethora of reasons to be bullish on the country in the long term. As one article from last December contrasting the country’s steady growth with the boom and bust of Dubai reiterated:
Egypt has spent years reforming its banking sector and attempting to increase investment from companies abroad. The Central Bank has tightened banking regulations, while the government has cut red tape on trade. It has also embarked on massive infrastructure projects, such as building a modern international terminal to serve the Cairo airport and beginning construction on a third subway line.
The Egyptian stock market has unveiled new indexes, grouping different companies together to make their performance easier to track and to encourage trading. The initiatives paid off. In 2008, the World Bank ranked Egypt as one of the top 10 reformers worldwide in their ease of “Doing Business” report.
The country’s economy grew 4.7% in the last fiscal year, down from 8% the year before. But that is still higher than many developing economies such as Turkey, which grew only 1.1% in 2008 and is expected to shrink 5% in 2009, according to the IMF. Egypt is predicted to grow another 5% this year.
A report this week quoted the country’s Economic Development Minister Osman Mohamed Osman, who predicted that Egypt’s economy, spurred by rising exports, might grow by 5.5% in fiscal 2010/11 and attract up to $10 billion in foreign direct investment (FDI). That said, diminishing demand from the U.S. and Europe might make the figure hard to reach. The rub lies within Gulf economies that may pick up the slack. In essence, therefore, it may be asserted that an investment in Egyptian markets is a proxy on continued fiscal strength and cash flows coming from the Gulf. “As long as there are current account surpluses [in the GCC economies], I think Egypt will continue to benefit from the flows,” says London-based Ahmet Akarli, a senior economist for Turkey and the Middle East at Goldman Sachs. “These flows could go into all sorts of different investment opportunities – they could be FDI, they could be portfolio inflows [investors buying stocks the Egyptian exchange] – it really depends on what Egypt can offer. It’s hard to say where the money will end up being utilized, but it’s clear that Egypt will be, among others, an important destination.”
A new corporate governance code comes into effect this April in the UAE and attempts to “introduce internationally accepted corporate governance rules into the realm of commercial companies” in the emirate. For instance, listed companies will be compelled to disclose more details about their board members, such as whether or not they are concurrently serving on the boards of other joint stock companies. Analysts note that the new legislation may ultimately help realize higher market valuations by improving disclosure standards and thereby addressing one form of investor uncertainty.
Leopard Capital, which we profiled in the past, will take to the road in March to raise funds for both of its Sri Lankan-oriented funds–the Sri Lankan Fund LP, “a 10 year private equity fund targeting US$100 million [that] will primarily take minority positions in unlisted companies, targeting post-war growth sectors such as tourism, food processing, fisheries, consumer products, and retailing,” as well as a Value Fund, which will hold “both a core portfolio of smaller, overlooked ‘deep value’ stocks, and a trading portfolio of blue chips.” Both funds will be run by its newly formed Sri Lankan division. The firm also recently announced that Jim Rogers, the Singapore-based investor, author and commodity permabull, will join Marc Faber on the firm’s advisory council. That’s a pretty nice duo to headline your pitchbook.
Following the resounding reelection of President Mahinda Rajapaksa in late January–a surprising affair to many observers both in its relative peacefulness and its marked decisiveness–optimism is abundant for the long-time, civil war plagued island. As The Economist noted:
The economy, buffeted by a slump in garment exports and tourism because of the war, is perking up. This year the country is expected to see some 600,000 foreign tourists, compared with 500,000 last year. The New York Times has named Sri Lanka its top tourist destination for 2010. Annual remittances, mostly from hardworking Sri Lankans in Arab countries, have rebounded from a minor slump to around $3 billion. Last year the Sri Lankan stockmarket more than doubled in value, making it one of the best-performing in the world. Food prices remain punishingly high, yet inflation is down. The economy is expected to grow by around 6% this year.
Leopard, writing in its latest newsletter, agrees.
The [election’s] decisive outcome assures policy continuity for the numerous important infrastructure projects underway across Sri Lanka, including deep sea ports, power plants, dams, highways, railroads and airports. Most of these projects are being funded on concessionary terms by external donors such as China, India, Japan, and the ADB, providing billions of dollars of assistance for a country of just 20 million people.
Unnoticed by most global investors, this mini “Marshall Plan” will turbo-charge Sri Lanka’s economic efficiency and productivity, powering top-quartile economic growth for the next couple decades. Other domestic growth catalysts include the reintegration of the cut-off North and East provinces into the national economy, the return of tourists, the sharp decline of local interest rates and the reawakening of Sri Lanka’s hibernating capital markets. A massive private investment cycle is gathering force as business confidence ratchets higher and boardroom priorities shift from controlling costs to capturing fresh opportunities. We encourage you all to visit Colombo and sense the local optimism first-hand; it may be Winter in the West but it is Spring in Sri Lanka.
Long-term, two seemingly perpetual problems remain, however, which investors should factor in to whatever return they might seek on any capital they may invest. One, the ethnic divisions between Tamils and Sinhalese remain. Two, executive power remains separate from parliament and should (arguably) be returned, an outcome that rests on Mr. Rajapaksa’s desire to subvert his own power. To that extent, future division between political and ethnic parties may well reside on the strength and relevance of a main opposition party, which in and of itself will likely be a factor of how well Tamil and Muslim factions can negotiate and compromise. That said, there is little standing in the way of short term market acceleration, especially with a central bank committed to facilitating the President’s desire to see 7% growth in 2010. The country’s exports rose 6.4% in December to $723.4 million after a yearlong decline, while the central bank kept key benchmark rates unchanged and at a five-year low.
Citigroup Global Markets strategist Andrew Howell was on Bloomberg this past week discussing investing in frontier markets. Howell highlights Kazahkstan in particular as exemplifying the broader frontier story: relatively low valuations despite abundant resources and low debt, with (thus far) a smoother return and less risk correlation than developed indices or the BRICs, despite the fact that most frontiers in general rely on said economies for the bulk of their trade and capital flows. Howell concludes that frontier markets, which trade at 13.1x earnings, are not “stretched” relative to other emerging markets that trade above 20x earnings. As to a less commodity driven market such as Croatia, Howell points to financial services as a sector to watch, given the imment rise of credit. That said, a genuine global recovery is still the impetus for such growth, Howell admits, and any “double dip” among more developed markets will also tend to implicate its less liquid brethren. On the subject of Croatia, for instance, Roubini Global Economics predicts that “sluggish credit growth to the private sector will prolong recovery.”
My piece from February’s Business Diary Botswana:
At the peak of the credit bubble, observers noted that a “swell of private equity buyers, solid corporate profits, the availability of cheap debt and robust liquidity” all underpinned a $4.5 trillion global boom in M&A, an industry in which both volume and value are historically positively correlated with GDP. Yet the steadfast nature of that relationship may be in doubt–at least in terms of South Africa’s deal flow industry–if current projections prove accurate. While the continent’s largest economy took a harder than expected hit during the global recession, due primarily to an unexpectedly pronounced plunge in manufacturing, as well as in the world’s demand for raw materials, prognostications for 2010 are generally positive. Putting aside the IMF’s World Economic Outlook, released in October, which foresees fairly tepid growth of 1.7%, myriad analysts are quite bullish on the economy, drawing upon a host of indicators to support their optimism. For example, Nicky Weimar, Senior Economist at Nedbank, highlights the buoyancy of the very same manufacturing and mining sectors which caused the country’s hasty downfall; after being pummeled at the end of 2008 and into the first half of 2009, the two showed marked improvement in the third quarter of 2009, though admittedly on the back of the ever-increasing BRIC (namely Chinese) appetite for commodity-based exports. Other signs of comfort, she notes, include increased car sales figures (on a month-to-month basis) and improving trade activity and business confidence levels, including a two-point uptick in Decemeber’s Merchantec CEO Monfidence Index, a forward-looking survey of 100 executives measuring both current and expected conditions over the next six months. The boldest projections come from Old Mutual Investment Group, a Southern Africa-based asset manager, who in mid-January predicted 3.7% expansion in 2010 following the summer’s World Cup, and 4% growth in 2011 against the backdrop of an inflation rate hovering somewhere “around the upper end” of the Reserve Bank’s 3-6% CPI target range. “The combination of a recovery in consumer demand, ongoing robust public sector spending, an end to the cycle of destocking, moderate export gains and the World Cup Soccer, could combine to generate a surprisingly robust acceleration in growth during the middle quarters of 2010. We could even see another interest rate cut from the Reserve Bank adding to the positive conditions, should inflation surprise on the downside and the rand remain strong,” opined Rian le Roux, its chief economist.
Amidst such hope, however, is the stark reality of a continualy declining M&A market, which saw a 61% decrease by value in deals from the year before, and which Mergermarket, an industry intelligence service, expects to further languish in 2010 due largely to “increasing unemployment figures [that] have taken a substantial number of paying customers out of the economy, affecting sectors such as retail and manufacturing.” In particular, the group noted, telecoms may have to “rethink growth strategies in the year ahead in light of the failed attempt to merger MTN and Bharti as well as pressure to lower tariffs due to government intervention and increased competition.” That said, other industries may outperform despite a falling and corrective, pre-World Cup market that even most market bulls accept as a likely requisite for accelerated growth in latter quarters. For instance, Standard Bank Group Ltd. and FirstRand Ltd., the country’s largest lenders and with Chinese ties, announced mid-month that they had registered an interest with Nigeria’s central bank (CBN) to investigate the possibility of acquiring distressed domestic lenders, something industry consolidation-seeking Nigerian authorities would readily embrace having decided last October to limit domestic banks’ market share to 20% and to prevent the country’s biggest lenders from acquiring stakes in the ten institutions that failed an August audit in which regulators determined that certain institutions had built up bad loans that left them too weakly capitalized to sustain their operations. Financial M&A in Nigeria “makes sense,” London-based Silk Invest’s Baldwin Berges wrote to investors in January, given that “there are more than 150 million consumers in Nigeria (and 3-4 million new ones are born every year), and [that] most of these people [will] need to access the financial services industry for the first time. A genuine growth market that can [thus] be entered at a handsome discount. This could well signal the beginning of the next major chapter in the development of Nigerian banking, a more joyful one for a change.” Yet pricing such deals could be tricky. “There is a fine balancing act taking place, however, as local banks assess these opportunities carefully so as not to get burnt by any risky assets they may acquire,” Mergermarket said. To that extent, “there may be concern over the quality of the assets at distressed banks,” Henré Herselman, a derivatives trader at Johannesburg-based BoE Stockbrokers, told Vanguard, a Nigerian daily newspaper. The upside of such a deal, however, will likely be too good to pass up. From Standard Bank’s standpoint, an acquisition would at worst bolser its current presence in the country, while best case add market share and scale in its operations. For FirstRand, entrance would mean the newfound birth of a Nigerian division (i.e., a “greenfields” approach) that would include both commercial and retail units, in a relatively mature environment that Sizwe Nxasana, its CEO and the first-ever black South African CEO of one of the country’s five largest banks, reiterated to CNBC Africa would already “suit mobile money transfers, investment-banking products and debt and equity capital markets products.” Kokkie Kooyman, head of Sanlam Investment Management Global, offered a more sobering take on Nxasana’s vision. In the firm’s “rush to expand into Africa,” FirstRand “might make bad acquisitions. This then means they would have to put in lots of money in an effort to fix the acquired entity,” Kooyman said. “It is going to be very tough for FirstRand. Another problem would be establishing accounts and control functions in those countries. This means they would have to send talent out there, which will not be good for the company’s operations here at home.” Nxasana, however, likely feels emboldened from the July partnership agreement he signed with China Construction Bank in order to help both companies win investment, corporate and project finance deals across Africa.
Yet while analysts, fund managers and investors alike ultimately anticipate a relatively imminent flurry of action in Nigeria’s financial sector–events that, per the Financial Times, some observers think “will reshape not only the Nigerian banking system, but possibly the pan-African financial services landscape”–the exact timing and true breadth of such dealmaking is up in the air. Last November, for example, the FT wrote that in naming Deutsche Bank as the leading adviser to “oversee the stability of the Nigerian financial sector,” the CBN was essentially signing off on the expected sale of at least nine Nigerian banks, and that “a number of UK, South African, domestic and Asian banks [had already] emerg[ed] as interested buyers.” Moreover, South African ones, in light of their hitherto presence regionally and in conjunction with their generally strong balance sheets and ability to raise funds to finance large acquisitions, were assumed to have the upper hand in prospective talks. That said, the pie at hand is finite, and the spoils aren’t exactly equitable in nature. Speaking to Bloomberg last month, John Storey, an analyst at Bank of America-Merrill Lynch, labeled Guaranty Bank as “the best-in-class bank within Nigeria that provides exposure to upside surprises to the oil and macro-economic story,” while concluding that “Zenith, United Bank for Africa, Guaranty and FirstBank,” the four largest banks market capitalization, were the most attractive targets. But bank executives would be wise to be choosy, especially amongst those not considered best in class, no matter the apparent discount. As history has shown in at least one industry, namely the telecom market, Nigerian-based dealmaking can be fraught with perils. For every MTN, there seems to be a Vodacom. Caveat emptor.
Against the backdrop of soaring CDS spreads for the likes of Greece, Portugal and Spain, certain central European countries–namely Poland and the Czech Republic–continue to garner increased attention from investors looking to flee risk but still earn appreciable yield. As Dominik Radziwill, Poland’s deputy finance minister, who helped place a €3bn 15-year bond issue last month, told the FT on Friday, “we are a safe haven. We have become an alternative for investors who are looking at the periphery of Europe. We can see an increase in interest on the part of foreign investors in Polish debt.”
Some observers tout the virtues of Polish debt both in the short and long term. According to Baron Chan, an emerging-market strategist with Credit Suisse Group AG in London, in regards to the government’s vow to limit spending growth and speed up asset sales in order to bring the budget deficit in line with euro-adoption standards, “the idea of acceleration in fiscal consolidation will be good for the risk profile of Poland and should support the zloty.” Credit Suisse, for one, anticipates the euro/zloty, now at 4.11, to trade around 3.75 by year end. Meanwhile, Investec Asset Management touts the long end of Poland’s yield curve, noting thje country’s “good fundamentals and flows supporting bonds.” In particular, some analysts forecast the 10-year Polish bond yield to fall around 30 basis points in the first half of 2010 from 6.1%.
As for the PIGS label, it seems Ireland has replaced Italy, for those keeping tabs on the acronym.
Bloomberg relays Citigroup’s sentiment that frontier markets, which trade at roughly 13x earnings (compared with emerging markets at 20x) and many of whom still trade at 50% or more below their 2007-2008 highs, are due for a “good year” on the back of low interest rates and rising commodity prices.
One of Citigroup’s favorite frontier stocks is Karachi-based Engro Chemical Pakistan Limited, the country’s second-largest urea maker which, aside from spending $1.7 billion to expand its operations into milk and consumer goods (Engro Foods) in the past three years, announced in November that it would construct a $1b phosphate fertilizer plant in North Africa in order to further fuel demand in both Pakistan and Western Europe. The company also deals in energy, polymer and bulk handling. Yet fertilizer remains the firm’s cash cow, BMA Capital explained last fall in the linked research piece, and will continue to provide the impetus for future growth:
Protection of agrarian policies by the government and stable gas supply has greatly helped the fertilizer arm making it stable, profitable and secure. Urea is locally available at a significant discount to the international landed price of the product. Current retail prices of PKR797/bag compared to international landed cost of PKR1,200/bag means that locally available urea will continue to be preferred. Engro will become the largest urea producer of Pakistan by mid-CY10E with additional capacity to the tune of 1.3mtpa coming online.
JGW
Frontier Markets 