In this week’s edition of the weekly update we pick a few stories that have caught our attention and that of the markets. As I write this, I am in Abu Dhabi after having been in Qatar and Kuwait. It’s always great to get some local insight in these times of loud headlines!
The week started with rumours that Dubai’s beleaguered Nakheel would file for chapter 11. Shortly afterwards this was followed by talk of a proposed arrangement to creditors of the defaulted debt which would command a haircut of 40% (ie. bonds paid back at 60cents on the dollar) and an extension to 7 years without interest. In addition, there was mention that two options would be given to bondholders: a government guarantee or the transfer of Nakheel assets. Formal offers to creditors are likely to be made towards the end of April.
For now this is all talk and Dubai is, again, being uncommunicative – an attitude we have grown accustomed to by now. With all this mystery going around, negativity has probably already been more than priced in at current levels.
The market barely moved based on this new twist in the Dubai debt saga and while developments in Dubai may be keeping foreign investors away from the Gulf, it certainly is not deterring the locals who are keen to build up positions at current levels. Looking at price action, the markets barely budged, in fact, Dubai was marginally up as I write this. There would probably be even more money going into the market were it not the case that much private wealth is tied up in depreciated real estate investments.
In our opinion, Dubai is by far the cheapest GCC market at the moment and we are positioned in the short term to benefit from a rebound from these rock bottom levels while most of our Arab portfolio will continue to be powered by the Saudi, Qatar and Egyptian markets in the medium term. Local investors seem to have moved on and so have we..
With regards to Qatar, there is an can only concluded that local investors see great value in their market. The main theme in most investment strategies is all about investing locally, there is not much room to talk about anything else in the world’s fastest growing economy.
In Kuwait, the main development is Zain (telecom) who is in talks with Bharti Enterprises, one of India’s leading business groups with interests in telecom, agri business, financial services, retail and manufacturing. Bharti is pushing to acquire Zain’s African assets (excluding Sudan and Morocco). Bharti’s move comes after 2 failed attempts to agree a possible US$24 billion deal with South Africa’s MTN Group. The Indian group has proven to be more than desperate to enter the African telecoms opportunity.
Zain operates in Africa is in Burkina Faso, Chad, the Republic of Congo, the Democratic Republic of Congo, Gabon, Ghana, Kenya, Malawi, Madagascar, Morocco, Niger, Nigeria, Sierra Leone, Sudan, Tanzania, Uganda and Zambia. Zain has spent more than US$12 billion to expand in Africa since 2005. Africa represents about 62% of Zain’s 64.7 million customers but only 15% of the groups’s net profit. Zain currently operates in 24 countries.
Reportedly, talks will take place until march 25. The value of the transaction is estimated at around US$ 10 billion. The deal remains subject to due diligence, customary regulatory approvals, and signing of final transaction documentation. However, this transaction won’t be over ‘until the fat lady sings’ as there may be issues regarding Zain’s Nigerian subsidiary, which currently finds itself in an ownership dispute with Econet. Nigeria is the biggest operation in Zain’s African portfolio. Zain Africa contributes 46% to group revenues
The last tame Zain was in talks with regards to offloading its African businesses, the deal collapsed and many concluded that the whole operation was more of an exercise by Zain to put a ‘value’ on its African subsidiaries. It would seem that from our conversations in Kuwait today, many locals are suspicious that Zain is again trying to pull off something similar…
From Bharti’s point of view, this deal makes sense. Mobile phone penetration in half of Africa’s countries was below 40% as of August, and a dozen countries had penetration estimated to be below 30%. These are the ingredients for lots of upside. Just as last time, the same question comes to mind: why sell such an obvious growth opportunity after 5 only years? I guess we’ll have wait and see if the ‘Fat Lady’ comes up on stage…
With regards to Saudi and Qatar, be on the lookout for goods news with regards to improvements in financial and inventory Management, an increase in local buying power (retail, and industrial) as a result of government stimulus. Expect good news from the Saudi banking sector banking sector in the next round of reporting (e.g. increased lending the surplus between deposits and loans has reached a peak). You may need a little bit of patience, but the value is more than compelling!
We are aware that most foreign investors are keen and curious about Africa these days, and that they are realizing that many of the things that made them believe in BRICs can be found there at a major discount. All this is true, but at the same time, we strongly advise not to miss the potential upside in the Gulf markets at these levels!
Highlights from this week’s updates (attached)
Smooth power transition in Nigeria There has been a smooth transition of power from president Ya’Adua to acting president Goodluck Joanthan, who seems very keen to continue to execute the progressive agenda of reform which, amongst other things, mainly consists of taking on corruption, and strengthening the financial services sector. There is a more detailed comment in this week’s update.
Ghana is turning into one of the darlings of foreign investors. The country is expected to start pumping crude as soon as the in the 4th quarter this year from its recently discover oil fields.
Morocco’s economic projections continue to look favourable. We are seeing a rise in stock market activity which means that both local and foreign investors are increasing their allocation to this market. A major economic support plan which will mostly invest in infrastructure is projected to ensure an economic growth of 5% in the kingdom through 2012. Inflation is projected to remain under 2% for this period! There is more detail about Morocco’s growth perspectives in our weekly update.
The promise of corporate bonds out of Nigeria, Ghana and Zambia. We sensed last week that there is tangible movement towards issuance in the African corporate bond market space. More about this in our weekly fixed income update.
We hope you find our updates of interest and we look forward to keeping you updated. The weekly reports can be accessed on via this website.
With kind regards from the Silk Invest team
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