Yesterday evening I was on the phone with my colleague, Zin Bekkali, who is in Nigeria at the moment; he was telling me how downbeat the sentiment is amongst the local investors. We’ve actually seen this before in markets that haven’t been around for very long, the lack of the experience of having lived through past boom and bust cycles often makes for less perspective and magnifies the drama of events.
There is an old saying that goes ‘not seeing the forest for the trees’ and that is most likely what is happening with many local investors in the frontier markets. A cycle of bust comes after a period of boom in which all attention goes only to the ‘hot’ home market. Repeatedly you will hear ‘Why would we invest elsewhere with all the opportunities here’ a general attitude that comes at the expense of the wider global perspective. The lack of diversification becomes apparent when boom turns to bust but then the mindset shifts to trying to understand the problem, with the risk of becoming a hostage of negativity in the process. It is behavioral finance at its best.
In our opinion with regards to Nigeria, not enough credit is being given to the vast opportunities or to the measures that the financial authorities have taken to deal with the problems in their financial system. As always, it will probably take a few more foreign investors to turn around the sentiment amongst local investors.
These are new markets and in order to invest in them you need to understand the local psychology. When combined with the experience and insights of seasoned investment team, much value can be added.
I haven’t been in London very often as of late due to my ongoing travelling schedule, but despite all the trouble, layoffs, the financial crisis and all the people I know that have lost their jobs, there still seems to be quite a busy crowd on the City’s streets. And while people seem a bit more stressed and I get the impression there are more suits and ties being worn than before the hard times (usually a sign that people have to work harder), I can’t help thinking that only recently have we been told that things were going to be as bad as in the early 1930s. The point I am trying to make is that this is not the first time nor will it be the last time that the city of London has gone through a rough patch like this and it is thanks to the collective experience of the City that the finance community always find a way to get back on its feet.
It has only been a few months since Zin and I listened to countless people forecasting doom and gloom in the Gulf region. Everyone was so downbeat on the outlook to the extent that we were wondering if we were too naïve or missing something enormously fundamental. You probably know our positive view on the fundamentals and the privileged position in which most of the GCC find themselves in (good reserves, competitiveness, geographic location, etc). And although markets are better and there is increasingly good news, it would be fair to say that the local investor sentiment remains rather skeptical.
There are still concerns about bank debt that linger on in the Middle East. Fitch Ratings issued a report that downgraded a number of UAE banks and corporate players. Fitch said the UAE’s sovereign credit profile is being strained by the increased risks from contingent liabilities arising from its role of ensuring financial stability in the country. While the UAE economy is still fundamentally strong, “the lack of clarity on the process for non-budgetary financial transfers between the UAE federal government, central bank, and individual emirates, is a source of weakness,” said Fitch. With the financial crisis deteriorating in in September 2008, the UAE government injected liquidity into the banking system mainly through the placement of deposits by the Ministry of Finance and the Central Bank.
Again, and as always, we need perspective here: the ‘financial transfers’ Fitch refers to are arguably not that majestic when compared to the levels that have been witnessed recently in the US the UK and a number of other European countries. In addition, there must be a reason why there is such an avid discussion about auditing the Fed to better understand how the funds were exactly distributed. The point is that if there is a problem regarding the process of transferring money from governments to the private sector, it really is a problem that takes place on a global level! Most of the developed world is now finding ways to raise taxes while others don’t have to do so because they have the benefit of national reserves…
Regarding last weeks’ market action and developments, there is not that much to report. The MENA markets came out of a half week due to holidays with considerable strength. Tunisia continues its ascent upwards, Morocco is waiting for more H1 earnings to be reported. We think Nigeria has bottomed out but we don’t discard some more volatility in the short term. South Africa has been coming off recent highs and there have been a few more ‘silk route – type transactions’ (intra-regional corporate activity ) taking place, of which a few involve Kuwait. More detail on all this can be found in our weekly updates
We will soon be launching our ‘Silk Road Income Fund’, our fixed income fund. The fund will provide investors with access to a diversified portfolio of fixed income opportunities across Africa, the Middle East and Central Asia. Please stay tuned for more news on this.
Kind regards
Baldwin
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