We had a week tilting to negative for equities across Africa and the Middle East. What stuck out were Egypt and Kuwait’s intra-week drops that left big red spots on the scoreboard. The Egyptian market has been on a fiery rally during the past few weeks and this correction could well have been triggered by Orascom’s Corporate Family rating downgrade from B1 to B2 on the back of some issues with its Algerian’s subsidiary (more detail in this week’s report).
We got to have a peek ‘under the hood’ of both the UAE and Nigerian banking systems this week. The UAE Central Bank said that a total of 20 banks had a collective exposure of just under $3bn to the Saad and Al Gosaibi Groups for which they must set aside provisions before the end of this year. This disclosure clears up the uncertainty that banks had under-provisioned, which they clearly have. It justifies why we mostly stayed away from UAE banks in our portfolios. The good news is that this helps to cast away one of the ghosts in the UAE’s financial community.
In Nigeria, Union Bank became the first bank to have failed the Central Bank’s audit to release its latest figures. Without going into detail, the conclusions from the report already has analysts plotting possible takeover scenarios in the Nigerian Banking sector, we will keep you updated on how all this evolves. The CBN also confirmed the seven advisors that will work with the new boards of the banks that failed the recent audit. Again, more demons are being casted away in this market.
In the fixed income space, primary market issuance has dominated the news and the attention of the market this week, with relatively low volumes trading across the board in the secondary markets. The much-hyped State of Qatar bond issue broke the record for the largest ever “EM” debt issue (USD7bn) on an order book said to have topped USD30bn – a real monster!
The over-subscription during the book-building process was a bit like a meat market in wartime as locals and internationals alike scrapped for their allocations in what looked sure to be a rallying price run at launch. In the event, a slight upward re-pricing of the launch as well as an increase of the overall amount taken by Qatar from USD5bn to USD7bn, meant that much of the slack was taken up by the issuers itself. This in turn had the rather disappointing impact of see-sawing the bonds up in the grey market, then back down at launch. We were keen to get involved but decided to leave it until the uncertainty on the deal size and pricing had been more fully digested by the market. Bonds have now settled down, but a general sense of de-risking before year end is preventing any sharp bounces in the bonds, despite there being some upward momentum across the yield curve.
There are several bond issues coming out in hard currency across frontier markets. Commercial Bank of Qatar, Gulf International Bank and ENBD are all on the road, with talk of Angola issuing a first-time unrated sovereign bond to the tune of USD4bn. We’ve heard that Belarus, Vietnam, Russia, Kazakhstan and Iran are also looking at tapping the currently low interest rate environment. This makes sense when considering that many frontier market currencies can be considered as undervalued at present. The uptake on recent GCC issues as well as Sri Lanks’s USD500mn deal early in the year would imply that there is still substantial untapped demand for these new issues out there. One reason for this heightened demand lies in the relative value dynamics: for example the 5 year tranche of Qatar’s new bond is currently trading 100 basis points wide of the equivalent maturity in Italy’s sovereign debt (A+), while Italy has no hydrocarbon resources and is rated one notch below Qatar (AA-). This is yet another piece of evidence in defence of the need for investors to revisit the way risk is perceived. I guess you already know our position on this topic by now. The fact that we recently launched the Silk Road Income Fund quite clearly reveals our side in this ongoing debate.
As every week, there are more ‘Silk Road Stories’. These are examples of how the African, Asian and Middle Eastern regions are increasingly connecting with each from an economic perspective:
DP World expressed interest in investing in Sierra Leone’s port privatisation, according to the country’s Ministry of Trade and Industry, the company stands a good chance of winning the port contract, given its brand name, leading position and expertise.
The Kazakh parliament, the Senate, ratified the agreement between Kazakhstan and China on cooperation in the construction and operation of the Kazakhstan-China gas pipeline. The gas pipeline is planned to transport both Turkmen and Kazakh gas through a new transportation system passing through Kazakhstan on its way to China.
It wouldn’t be called the Silk Road had there not been a connection to Europe as well. UAE’s Drake & Scull acquired 82% of Passavant-Roediger (PR), a German specialist in water and sludge treatment, The company has operations in MENA (Algeria, UAE, Jordan, Lebanon, Egypt and Saudi Arabia ), Asia (primarily China) and Europe (Romania, Hungary, Poland, Croatia, Germany and Turkey). We find this deal interesting as it is an example of the new world acquiring old world expertise & know how and put it to work to improve margins by developing synergies and expand further in MENA and other attractive geographies…
We look forward to keeping you updated
The Silk Invest Team
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