This headline appeared somewhere earlier this week and it seemed very appropriate to apply to this week’s update. Over the past couple of weeks we have seen the kind of developments that potentially will make the ‘tough’ amongst us very happy in the weeks or months to come. Here is a summary of what we believe to be the recent key events across the Frontier Market Space:
Goodluck Jonathan has been re-elected as Nigeria’s president as he came out of the polls with a comfortable majority avoiding a run-off second round. However, only a few days earlier, his party, the PDP had lost considerable terrain in the senate. This is exactly the kind of thing we find interesting to see because it hints that there is now a fairly functional democratic system in place in Africa’s most populous nation. A weaker position in the senate will keep Goodluck Jonathan on his toes to really make a difference and deliver on the reforms he stands for. Nigeria’s political system seems to be maturing.
Both Dubai and Qatar will potentially leave the MSCI Frontier market universe and become constituents of the MSCI Emerging Markets index. There is a debate about the impact the change will bring along. While some claim that being a tiny fish in bigger pond is not a good thing; our view is that incorporation will be positive. For our part, we will continue to invest in these markets until they become large enough to be on large investors screens. Of all the many investors we habitually meet, today there are very few who are invested in these markets. It is pretty obvious that being part of the EM index will bring all these people into the market as their fund managers re-balance their fund to reflect the new weightings. The UAE and Qatar have come of age and are increasingly active in the global economy. It is fair to say that an upgrade is overdue!
Kenya has been under-performing lately; a central bank rate hike could have evoked concerns of higher inflation. What is interesting is that local institutional investors now own roughly 75% of the listed equity market; this is roughly 20% higher than before. Local investors are ‘buy and hold’ so we may be looking at a bottom for this market at this junction.
Bond issuance is again coming to life across the frontiers. New issues will be seen by Senegal, Georgia and Mongolia. If the US market can rally on S&P’s concerns about the US’s credit outlook than in the same logic these bonds may deserve a look – they pay high coupons and generally have very robust sovereign credit profiles. So far, 2011 has shown to be quite an eventful year with a flock of black swans taking to the global pond. One would have expected panic and volatilty in the frontier bond markets but the serenity we have seen has been quite surprising. This calm makes us think that the risk premium might even be too generous at these levels. You almost want to keep it a secret and enjoy the high income!
The unexpected detention of Mubarak & Co on the charges of widespread corruption is yet another way to illustrate the Egypt has indeed changed. We note that the IMF has penciled in a GDP drop of 1% but that will rebound to 4% in 2012. Our guys on the ground there seem to be believers that it will all be good.
While most of us are worried about rising inflation levels, Saudi Arabia recorded another deceleration of the consumer price index. Remember, they have the money in the bank to deal with inflation. Higher oil and gas prices have obviously make Saudi even stronger in the credit profile pool. A mortgage law is about to be passed so watch out for a vibrant real estate market on the back of this.
Markets are very quiet in the Maghreb region even though Morocco is getting put in the spotlight as one of the favorite African economies. Goldman, Forbes Magazine and French COFACE all came out as big endorsers. The IMF topped it off with a very positive economic outlook for the kingdom. Tunisia’s strong earnings reports by listed companies took many investors by surprise. Overall, Q1 results were considerably above expectations. Tunisia is yet another example of ‘be careful what you wish for, because you might actually get it’. Revolution in fast-forward!?
After Walmart’s monumental decision to enter the African markets, another milestone and a major vote of confidence for frontier markets was established by KKR, one of the major private equity buy-out firms making its first foray into Vietnam this week with the acquisition of a 10 per cent stake in Masan Consumer, the country’s biggest producer of fish sauce, for $159m.The acquisition, which values Masan at $1.6bn, will be the largest private equity deal in Vietnam to date. It underscores how the biggest private equity groups are turning to emerging markets and seeking smaller deals as they count on rapid growth. Masan Group is our only Vietnamese holding at present, so we are very pleased with KKR’s valuation.
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