We enjoyed a strong bounce-back last week. The Middle East strongly recovered now that the Dubai issues have moved to the background and we saw a pretty good week for most of the African markets, some of which performed impressively, especially those of Egypt and Ghana.Local currencies were generally up in line with the US$. Much focus is now going to the Euro and the sovereign debt issues of some of its minor constituents. More attention expands perception and while currency forecasts have always proven not to add much value due to the complexity of the factors involved, we believe the world is increasingly going to realize that the US Dollar is now less linked to the fundamentals of the US economy and is increasingly regarded as the currency of this world, more specifically, that of the new world. The focus on the macro issues in Europe may take the attention off the US economic fundamentals, a development that our friends on the other side of the Atlantic will certainly welcome.
We are hearing from many investors that the essence of their investment strategies of 2010 will be much about fixed income. Let’s hope, for their sake that this also means investing in new markets. Speaking for ourselves, It is currently possible to put together a portfolio with a yield to maturity in excess of 12%. Compare that to the current short or medium term yields in the Europe or the US which currently find themselves somewhere between the anemic levels of 1-3%. It certainly makes the case to allocate a portion of the portfolio to Frontier markets.
Still not convinced? Consider that, in many cases, the credit score is even more solid as many of these countries have low levels of debt outstanding and hard assets (resources) as collateral. Local currencies have been underperforming during the recent US$ decline and we believe that the time has now come for fundamentals to trigger an upward revaluation. Bear in mind that many countries have only started to roll out their debt program for a variety of reasons, many which are constructive. We spoke about this in more detail back in October in an article we called “The mother of all carry trades” (we would like to take this opportunity to say that we are grateful to Nouriel Roubini for adopting this statement and for adding notoriety to it!). For those interested, the article we refer to can be viewed at THE SILK ROUTE INCOME FUND AND ‘THE MOTHER OF ALL CARRY TRADES’
To top it off, we are currently looking at rather steep yield curves for both € and US$ government bonds. If economic theory still applies, it means that rates are on the way up. A steep yield curve could be the harbinger of inflation or strong economic growth, or a combination of both for that matter. By now you already know our supportive view on the regional dynamics of the markets on which we focus. The possibility of stronger economic growth and/or the risk of higher inflation in the developed world only further strengthens our positive outlook on our region. What other reasons can investors possibly expect to get to start allocating to this opportunity?
So what has been going on in the markets of Africa, the Middle East and Central Asia? Please have a look at our weekly reports, they cover the recent trends and developments in our markets of focus. Some of the highlights are:
- World Bank forecasts strong growth for the Kenyan economy in 2010
- Egypt is on a drive to attract more than US$ 110 billion to its energy sector
- Morocco offers incentives for the ‘second home’
- Maroc Telecom makes money transfers via mobile phones possible between people in the African community and Moroccan residents abroad.
- Out of the Dubai World mess emerges a fresh bankruptcy framework in the UAE
- Kuwait may be the first Gulf country to report a budget surplus due higher price of oil. This is expected and is likely to fuel further upside for these markets as other regional countries are likely to post similar numbers in the very near future.
- Saudi Electricity plans to build an electricity grid that will eventually connect six Arab Gulf states.
- The Nigerian Niara has been edging upwards and the bad news in the banking sector is starting to become a theme from the past.
The is the last update we will be sending out for 2009 so on behalf of the entire Silk Invest Team, I would like to extend to you our most sincere season’s greetings and thank you for your ongoing support.
With kind regards,
The Silk Invest Team
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