We had quite a multi-directional week in our Silk Road investment universe. Nigeria jumped over 3% on the week but it was offset by its currency, the Naira which declined by a similar amount, partly in line with the USD versus the Euro. We are now living the aftershocks of the Central Bank’s (CBN)audit on the financial institutions that put another 2 banks on suspension and booted out their respective executive management teams, as discussed previously, the CBN seems to have a clear playbook for these kind of interventions and it is likely that the sector can now return to normality as some of the institutions have obtained shareholder approval to raise new funds on the debt market.
Kenya fell further with cocktail of positive news on economic growth during the world’s recent recession and good earnings in tourism and detractors in the agricultural sector on the back of a poor rain season and some supply disruptions due to political issues. The Kenyan shilling however rose slightly. In the short term it is often hard to make sense of local currencies, good diversification in these markets protects again volatility but a convictional ‘tilt’ to the undervalued opportunities must be maintained.
Again this is good time to point out that Kenya and Nigeria are the two markets that represent the biggest upside, and in our view patient investors will be rewarded handsomely. Note that going back to their 5-year highs would mean returns in excess of 200%. Add to that the case for extra returns that could be derived from a currency recovery (read: regression to the mean) in these markets give it extra appeal. It becomes more obvious from a mere currency perspective versus the Euro (our base currency) in the below graph.
South Africa added another strong week but also saw the rand weakening. there is not very much to report out of the Maghreb region except for the fact that the Tunisian market had yet another week up. It is now probably time to take some profits in this run. Egypt took a slight breather but things are looking increasingly health on the macroeconomic front. It might also be a good moment to have a look at the major African markets PE levels vs the MSCI world as illustrated below. Simply put, earnings are generally more robust that in developed markets but remain priced at a handsome discount, even in the case of South Africa and Egypt, which have recently been the region’s performance champions.
With regards to the Middle East, apart from the fact that Dubai is now clearly on the road to recovery (I was briefly there last week and sentiment generally feels much more positive) I can’t really find anything to highlight in this week’s report. The attached updated should provide a good round up of what has been going on. However, one thing that is noticeable is that there is clearly more consolidation (M&A activity) going on in the food industry in Saudi Arabia. Kuwait is now one of the worst performing market in the world, again, asset allocation is everything, we have been happy with our low allocation of only around 3% of our portfolios in that country.
We look forward to keeping you updated.
Link to this week’s reports.
Kind regards
Baldwin
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