Most African and Arab stock markets lagged the positive trend of the BRIC and other emerging markets expect for the usual suspects such as South Africa and Egypt which performed in line on the upside. It’s another chapter in the same old story: the markets that were up this week are part of most of the major market indexes, those that lagged, aren’t. In other words, global flows automatically find their way into these index constituents. This further widens the valuation gap between major EM and frontier markets. We believe the value of these markets will eventually become obvious to the return seeker and it won’t take much volume from global investors to trigger a catch up rally, it is less a matter of ‘if’ but more about ‘when’.
The weekly EM performance chart was taken from www.emerinvest.com, a great site for those who are looking for a comprehensive summary of emerging markets.
What is happening along the ‘new Silk Road’?
There is no lack of initiatives in Egypt as this economy seems to be travelling down a very pro-active path lately. The Ministry of Trade and Industry announced a target to increase trade volume between Egypt and Turkey to USD 5bn within a few years, up from USD 2.0bn recorded last year. Total trade between the two countries is expected to come in at USD 3.5bn this year. Furthermore, the minister announced the establishment of two major Egyptian investments in Turkey in the pharmaceuticals and construction sectors.In addition, Egypt’s annual trade volume with China is due to grow to USD 10bn within the next three years, up from the current USD 6bn.Egypt is aiming to focus more on exporting value added goods, such as chemical products, construction materials, and leather goods. Also, note that the Suez canal’s revenues are up again by just over 4% in October, this is possible possibly a good gauge that global trade may be on the rise again.
It was a hectic week on Morocco’s stock exchange due to some names being taken out of the MSCI EM index, this resulted in much higher than usual trading activity. The level of Foreign Direct Investment (FDI) into Morocco is seen returning towards 2008 levels at around 2.7 billion Euros in 2010.We often speak about the resilience of Foreign Direct Investments(FDI) and how we expect this activity to grow.There is no lack of good examples of large investment initiatives finding its way into the continent’s infrastructure, here are a few examples of recent developments in this area:
The European Union plans to spend KES 10bn in Kenya over the next five years on various development projects. The funds will be part of the grants awarded to Kenya to support poverty alleviation, road rehabilitation, implementation of good governance and economic development.
The Central Bank of Kenya (CBK) launched Kenya’s second infrastructure bond last week, inviting bids for KES 18.5bn (USD 248m) – a 12‐year issue with a 12% coupon. The proceeds would be used to finance road, energy and water projects during the 2009/10 fiscal year.The first KES 18.5bn infrastructure bond with a coupon of 12.5% was offered earlier in the year and it attracted bids worth KES 26.9bn (145% performance rate) at an average yield of 13.5%.
Nigeria will receive a USD 300m loan from the World Bank to further develop its power sector.Nigeria’s Federal Executive Council gave the go‐ahead to accept the loan from the World Bank’s International Development Association (IDA) for its electricity and gas improvement projects. Nigeria last month disbursed USD 2bn from its windfall oil savings as part of an economic stimulus package. The federal government said it would use some of the funds to improve its power sector.
Furthermore, with regards to one of this newsletter’s main recurring stories, things seem to be calming down in the Nigerian banking sector.The Central Bank (CBN) resisted lowering its key interest rate below 6% (but altered its 2% corridor for loans and deposit rates to encourage lending) despite political pressures to effectuate a cut.We continue to be impressed by the CBN’s determination and its efforts to clean out the mess in Nigeria’s financial industry. For those who are new to this saga, private sector credit outstripped government spending for the first time last year, but that credit included loans to stock market speculators and fuel marketers which have since turned bad. Nigeria has injected around NGN 600bn (USD 4bn) into the banking system since mid‐August to rescue nine weakly capitalized financial institutions. The move, which included sacking chief bank executives and directors, sent shockwaves through corporate Nigeria and prompted banks to impose stricter lending policies.
With regards to the GCC region, most markets came off under pressure. GCC Markets generally have come down over the past month with the exception of Saudi Arabia, (the largest country allocation in our Arab fund). The Saudi economic dynamics continue to be very positive. Our positive view on the construction theme in Saudi Arabia was supported by the announcement that the kingdom will require an estimated 1.2 million additional homes by 2015, compared with a projected supply of just 900,000. While the real estate sector is often a topic of concern for those not too familiar with the region thanks to the disproportionate coverage of the issues associated with the Dubai property markets, there are similar housing shortages in places like Abu Dhabi and Qatar at present.
Fixed income update
Frontier bond investors are beginning to entrench their asset allocation strategies for the year end. Trading volumes are tapering off week on week, and many investors who got hurt last year are de-risking from less creditworthy asset classes to avoid a repeat headache. This tapering off of in activity is suiting our build-out strategy: we have been able to buy into bonds in smaller size and thereby harness some of the catalysts and unfolding stories within our target geography
The market remains focused on specific long-standing events.These include the restructuring of three defaulted banks in Kazakhstan, Dubai’s debt workout and the new issues pipeline. On top of this there is the ongoing nervousness among investors trying to validate the global economic recovery, or lack thereof. Outside Dubai, the new issues pipeline also remains strong.
As was the case last week, the frontier bond markets continued trade on sentiment rather than actual credit events. We think this is going to change in the next few weeks before the markets bed down for the year end festivities.
Last week we highlighted our view that the Kazakh banking sector needs to attract new foreign ownership and investment. The Central Bank said that there may come a need to restrict foreign ownership to 50% in the banks. With three of the banks still in restructuring talks (the 3 controlling approximately 40% of total banking sector assets), debt for equity swaps are likely to have a natural effect of pushing up foreign control in the sector. We estimate the total foreign control of the sector to be around 22- 24% at the current time. Additionally, the Central Bank also hinted that new rules will be introduced stipulating that foreign companies or their subsidiaries must keep at least 25% of their deposits in local banks and at least 25% of their insurance premiums in local insurance companies. This should bode well for the banks not currently undergoing restructuring, as well as those banks having already carved out strong market shares in the insurance industry.
We retain our short term positive outlook on the Dubai debt situation. Aside from the positive sentiment coming from the authorities locally, we believe that as we approach the end of 2009, following the end of the financial results reporting season, we are likely to see cash inflows into bonds before year end as this market normalizes.
Our weekly updates can be found on our website.
We look forward to keeping you updated!
The Silk Invest Team
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