You are currently browsing the monthly archive for March 2010.
Dubaibeat notes that Hossam Shobokshi (pictured), the Saudi-national and ex-MENA Head of Private Equity at Standard Chartered Bank, recently launched the Alef MENA Value Fund as Chairman of Alef Capital, a Cayman Island-based investment manager. Commented Shobokshi:
“The MENA markets offer some of the most interesting value investment opportunities in the world today. There are a good number of well managed and positioned companies trading at good discounts of the possible range of their fair values.”
Per Shobokshi, Alef Capital’s principal investment ideology is rooted in “the well proven method of value investing” in lieu of top down, macro or even technical anlysis:
“Alef Capital keeps things simple. The focus is solely on two things and only on two things–quality of the company and the price we pay for it. Recently for instance, we are experiencing what we call ‘the GCC Shopping Festival’. We are actively buying securities of several well managed and well positioned businesses in the UAE and other GCC countries that are trading at substantial discounts. The abundance of value opportunities in the GCC is a relatively recent phenomenon as in the past couple of years good value opportunities in the MENA region were only available in the North Africa and Levant markets.”
Interestingly, Mr. Shobokshi laid out the essentials to value investing over on his Alef Group site. They provide a window into his methodology.
1. Strong Barrier To Entry – such as strong brand names, licenses, and unique real estate.
2. Cash Profits – Alef Group cares NOT for growth without cash or fancy accounting.
3. Good Price – Alef Group HAS to buy significantly below the Intrinsic Value of the company.
4. Successful and friendly Managers/Partners – Alef Group believes in being low key and in management acting for the benefit of all partners.
5. Out of Favor – Alef Group likes to help people – to quote a legendary investor – “When people are selling, selling, selling and rushing out”, Alef Group helps them and buys. When a country, industry, and/or company is out of favor, Alef Group digs deeper and we often discover jewels beneath the rubble.
6. Solid Balance Sheets – Alef Group prefers low debt companies that can survive in down markets, buy other weak competitors, or become targets for acquisition.
7. Superior Returns on Capital – Again, Alef Group prefers good management as exhibited among other aspects by above industry ROE (Return On Equity) and ROA (Return On Assets).
8. Low Cost Provider – Good management is able to produce the product/service repeatedly at a lower cost than the competition – relentlessly allocating the capital and spending the owner’s funds smartly. Again, in bad times this low cost proposition enables them to survive and exhibit superior growth when the economy recovers with full force.
9. A Product/Service Becoming Close to A Need – Examples are mobile licenses and utilities and even well loved brands comes close to this level with the customer enabling the company to defend and even enhance margins and thus creating future cash profits for the owners.
Herein linked is a recently published (sample) presentation on Frontier Markets produced by Morningstar Inc. as one of its ever-expanding Principia Presentations & Education products. A thank you to Alina Tarlea, Research and Communications Analyst for Morningstar’s Financial Communications Business, for sharing this. Alina’s team at Morningstar creates and publishes various communication materials for both individual investors and financial advisors, with the primary goal of educating investors about general investment topics (asset management, retirement planning, etc.), as well as producing asset class-specific pieces.
Antoine van Agtmael (pictured), the Chairman and CIO of Emerging Markets Management (EMM), and whom Bloomberg credits with coining the term “emerging markets” back in 1981, opined that while equities among developing nations are probably fairly valued (the corresponding MSCI trades at 12.8x estimated earnings for 2010, compared with its four-year average of 12.1), small caps in said markets are still lagging (6.2x after doubling last year) and may see increased interest from institutions going forward. He also mentioned Qatar and Saudi Arabia in particular among those “frontier” countries where market sentiment may currently lag inherent value:
“Qatar may be one of the most attractive among the smallest developing nations known as frontier markets, van Agtmael said, citing the pace of economic growth, the development of the Middle Eastern country’s real estate market and its gas reserves. The investor also favors Saudi Arabia, saying the nation is a ‘huge economy with huge oil reserves.'”
Two industries to keep an eye on in each country, respectively, continue to be real estate and banking. While commerical prices in Qatar fell between 20-30% in 2009, for instance, they are likely to stabilize in the second or third quarter of this year according to DTZ, an industry consultant, whereupon they should trend up again on the back of the overall economy’s expected, LNG-fueled 16% growth, as well as the overall industry’s cemented and collective distrust for “Dubai’s flawed, speculative building model.” Furthermore, government endorsed consolidation in the property development market may ultimately concentrate the allocation of revenues going forward, leading to higher enterprise values.
As for Saudi Arabia, Silk Invest hinted to investors last week an impending paradigm shift in the kingdom’s mortgage financing practices that likewise could be a boon for future cash flows in both the region’s financial and property management sectors:
“A Saudi mortgage law, which has been in planning stages for almost a decade, is likely to be passed in a few months from now. The implementation of the mortgage law is expected to drive Saudi housing demand and prices as more people access the market. If the law is finally put into place, it could usher in a new boom period for mortgage financing in Saudi Arabia, an area traditionally avoided by financial institutions due to a lack of proper regulation.”
Observers of Nigeria’s ongoing banking sector reform were further emboldened this past week by a statement released by the country’s central bank (CBN) indicating the increased likeliness that the Asset Management Corporation of Nigeria (AMCON) bill will indeed be passed and then signed into law. Having already been passed by the House, the Bill scaled its second reading at the Senate and has now been referred to the Senate Committee on Banking, Insurance and Other Financial Institutions, where a Committee on Capital Market and Finance will next conduct a public hearing and report back to the Senate within a prescribed four weeks period. Furthermore, pundits note that the bill would also have the credibility of Acting President Goodluck Jonathan’s support, though at the very least the peripheries of the country’s seemingly perpetual power struggle are still far from conclusively settled. AMCON, devised in response to the country’s own banking bubble that saw markets dip some 70% from their peaks, is described as “the principal vehicle for resolution of the solvency of asset quality problems that have risked the banking system in the last two years” in lieu of liquidation, and will seek to purchase non-performing loans (NPL) in order to help recapitalize troubled institutions and alleviate debt concerns. Specifically, per CBN governor Sanusi Lamido Sanusi, AMCON will purchase an estimated N1trillion to N1.2 trillion of toxic assets spread across eight to ten banks, effectively “cleansing” their respective balance sheets and pave the way for “fresh lending” while concurrently assuaging investors.
While seemingly extending its support, the Senate also made its disapproval apparent, warning the CBN “not to sell the troubled banks through the back door so that the interests of shareholders do not run into jeopardy.” At the same time, certain Senators “expressed concern about the mismanagement in the banks by their former managers, which they said was aided by the failure of the regulatory authorities to track them down before it (mismanagement) landed the banks in insolvency.” By and large, however, the response to AMCON’s imminent passage is one of relief. Nigeria’s equity markets, which have recovered nicely in the past two months and are up nearly 11% YTD, should continue their ascension from last year’s disastrous, post-bubble depths. As Silk Invest, a London-based frontier investment management company noted to investors this week, “needless to say, this development is very positive for [Nigeria’s] market as it locks up one of demons that has been pestering sentiment in the recent past.”
Dubaibeat reports that Daman Investments, a private sector UAE-based investment management firm, announced today the launch of the Daman Fifth Fund, a $54 million closed-ended fund. Per its press release, the Daman Fifth Fund is “a new mutual fund that will focus on blue-chip equities listed on the GCC financial exchanges, debt products and commodities, and targets an IRR of 25% per year.” Commented Managing Director Shehab Gargash, “[The fund] is an opportunity fund that capitalizes on the upcoming GCC market recovery. Our first closed-ended fund since the launch of the Daman UAE Value Fund back in 2001, which was also a market recovery fund that netted an impressive return of 273.84% over its lifespan.”
The release also highlighted the firm’s 2010 and beyond market outlook, reproduced below:
The GCC markets were serial underperformers in 2009 in terms of both absolute and relative numbers, when compared to EMEA (Europe, Middle East and Africa) and developed markets.
Immediate growth drivers
• The regional GCC markets are currently trading at forward estimated valuation multiples of 10.2x for year end 2010 earnings estimate which are at a discount when we compare to then historic PE average range of 18x for the past 5 years.
• Taking P/B ratios we continue to find further support for the valuation case with the GCC region trading on 1.4x 2010e.
• The FYE2010 dividend yield at regional markets is estimated to be at an average of 3.9% with many individual stocks having yields in excess of double digit figures making the region an attractive play for income related investors.
Catalysts for Long term growth
• The outlook for oil prices remains positive with most investment houses predicting stronger outlook for global growth, lower interest rates and a more realistic acceptance of the limits of energy supply.
• The IMF continues to forecast a benign macro environment for the GCC economies looking for them to increase their GDP some 10 fold from 1980 levels to 2020 equating to some US$2trn in GDP by then.
• The governments of the region continue to pursue stimulatory policies through increased infrastructure spending. This is proving to be a counterbalance to some of the pullback of private sector spending.
• On the Banking sector, we expect the banking sector NPL curve to peak in H1’10 and to start coming down in H2’10 releasing more liquidity into the system as the appetite to grant loans increases with the strengthening economic recovery.
• Petrochemical sector to remain strong for the year on strong global growth rebound trend. GCC players continue to enjoy a strong cost advantage vis-à-vis their global players.
• We continue to view the Real Estate market across Saudi Arabia and Abu Dhabi market as favourable with an improving credit environment and increased deliveries leading to both primary and secondary market demand.
• On the Telecom sector, we are positive with the Industry getting aggressive on price competitiveness and on new product introductions such as VoIP, and upgraded 3G technologies. Strong cash flow and dividend yield characteristics with a lot of the recent deal flow beginning to bear fruit this year provides us the level of comfort to remain bullish on this sector.
Mohamed El-Erian’s latest commentary elaborates on the newest theme in international finance, “the simultaneous and significant deterioration in the public finances of many advanced economies.”
“The shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter.”
What makes this crisis different from past ones?
“Governments naturally aspire to overcome bad debt dynamics through the orderly (and relatively painless) combination of growth and a willingness on the part of the private sector to maintain and extend holdings of government debt. Such an outcome, however, faces considerable headwinds in a world of unusually high unemployment, muted growth dynamics, persistently large deficits and regulatory uncertainty.”
The above analysis underlies PIMCO’s ‘New Normal’ thesis, which posits that the latest financial crsis “will have a widespread and long-lasting impact on global economic growth, government policy and the interplay between developed and developing economies,” and implies “lower growth, greater regulation and higher savings rates in the developed world, as well as relatively higher growth and a more prominent role in influencing global economic policy for the developing world.”
While not frontier related per se (hence the new post category–“General Market”), the following piece, put forth by Dino Kos, managing director of equity research at Portales Partners and a former executive vice president of the markets group at the Federal Reserve Bank of New York, in Monday’s Financial Times, makes a very convincing case as to why U.S. long dated treasuries could remain in tact for the near future–an almost contrarian notion at the moment despite the fact that the market is the world’s most liquid and that the security’s two biggest holders include two of the world’s largest economies (China and Japan). Moreover, I’ll argue that as long as there is a correlation between emerging and frontier market capital flows and the overall risk sentiment, treasury yields are as good a proxy as any as to where investors anywhere in the world see the best risk adjusted returns. Only until 30 year yields breach 5%, for instance, can we say that risk appetite is healthy again.
Interesting video (click for link) by FOX Business from a few days ago profiling the Damascus Stock Exchange, which was born following the Presidential issuance of Decree 55 (the Stock Exchange Act) establishing a market for securities trading, and which is approaching its first birthday while waiting to move to its new home (“the Eighth Gate”) in 2011. The government’s relatively newfound embrace of market-based principles is part of a pragmatic strategy to diversify and generate capital flows, analysts point out. Per Rami Bourgi, head of emerging markets for Société Générale Securities Services, “[Syria] realized it couldn’t rely on the wealth derived from its oil reserves and the government is reforming key institutions along the same lines as China. Oil sales are not ‘Saudi-like’ and they know privatization is a good way of raising investment levels for infrastructure spend.” Concurrent with ongoing market based reforms, Syrian President Bashar al-Assad has been openly courting a variety of international investors, going so far as to advise Turkish businessmen last month to “directly get in contact with him to report any issues they face when investing in Syria” and to assure them that such “difficulties will be resolved.” Presently, Turkey, Saudi Arabia and Kuwait are Syria’s top three sources of FDI, which in aggregate has risen from $152m USD in 2002 to over $2bn in 2008.
To maintain these flows, “reformist zeal” is rampant, say observers. In January, the country’s central bank announced two financial sector reforms that the bank hopes will “encourage large foreign banks to invest in the country and lend to a clutch of major new projects,” and that Adib Mayala, the bank’s governor, claims will “inject at least $2 billion into the financial system.” First, the cap on non-Syrian ownership of local banks was raised from 49% to 60%; second, the bank enacted “a mandatory requirement on private banks to raise their minimum capital from $30m USD to $200m for conventional banks and $300m for Islamic banks.” The importance of such changes cannot be underestimated, argued Raed Karawani, a Damascus-based attorney. “This will open the door for international banks like Citibank and HSBC to come to Syria. They didn’t want to be restricted to the 49% limit.”
Improved relations with the West, however, may prove to be the crucible to lasting change. Further U.S. or even newfound EU sanctions could nullify whatever reforms might exist. To that extent, the Obama administration’s nomination last month of an ambassador to Damascus was a necessary step towards the “thawing of relations.” What Syrian officials choose to do with this opportunity is another question.
JGW
Frontier Markets 