We now leave behind the first third of what has already proven to be a year that will be hard to forget. 2011 will especially be memorable for those of us who specialize in investing in Africa and the Middle East; you could say that during these four months, we have had a full set of challenges and scenarios thrown at us. For what it is worth, it has certainly been a good test and we are still standing tall and we have the feeling that the investors in our markets may also have picked up a thing or two. Our assets under management have even managed to grow and we are eagerly looking ahead.
What’s next? Will we have more political upheaval? Maybe, but it has by now very much become known territory to investors. Will there now be a big rally? That will be up to investors. For what we can see, both foreign and local players are still in ‘watch and see’ mode. Reasonably good performance in developed markets only further defers the decision for international investors to allocate to these little known new high growth economies. At current levels in most Arab abd African markets, probabilities most likely lean more towards a market recovery, even though some patience may be required until most investors upgrade their behaviour from simply acknowledging the bright future of frontier markets to actually investing in them.
I thought it might be of interest to provide an overview of the fundamentals and the performance of the African and Arab markets.
As can be seen on the chart below, there seems to be less correlation and a move back to a more normal pattern of diversity when it comes to the performance of the individual markets. The reason why Egypt and Tunisia top the league of the year-to-date underperformers is rather obvious after the revolutions they have been through. Tunisia has already started a comeback while Egypt is still cautiously sorting out what the new order will mean for the economy. Kenya has been giving back some of the performance after a good 2010. A correction was not only sparked by concerns of political stability but it also may have something to do with fears of higher inflation. As we have already pointed out a couple of weeks ago, this market has now become overwhelmingly held by local investors so this could mean that this market may have seen its lows. Bahrain and Saudi Arabia remain at the same level since the beginning of the year, despite the fears of drastic political upheaval. For now things seemed to have calmed down within both the kingdoms.
Another chart that we often feature is the one below that provides an overview of where the various markets are trading versus their 5-year highs. We believe this very strongly illustrates the catch up potential that some of the markets have, especially those like Egypt, Nigeria, Saudi Arabia and Dubai that are trading at levels between only 20% and 40% of their 5 years high. Even if these markets would double, they would still remain at a low value relative to the world’s major markets. If you are looking for good value, these may well be the places where it can be found.
Finally, if you have known us for a while, you will certainly remember that often we pull out a graph that very sharply contrasts the debt versus reserves between the developed and the emerging economies. As a variation, today we are posting a couple of graphs that zoom closer into the fundamentals of the different Arab and African markets. The point we are trying to make is very simple; we are seeing an unprecedented amount of economic stimulus in the developed world, in essence for a lack of reserves, new money is being printed to do this and nobody really knows when and where this is end. We are clearly in uncharted territory in the developed markets but investors seem to be very complacent about it all. What the charts below show us, is a picture of the external debt and the foreign currency reserves as a percentage of GDP.
The more than reasonable levels of debt and the abundant amounts of FX reserves clearly visualize the solidity of the balance sheets of these countries. Put in context, these economies can take a hit, they can stimulate their economies if needed without having to switch on the money printer, they can deal with imported inflation and every time we drive the price of oil or other basic resources upwards, it often only results in even further improving the finances of these nations. We believe that sometime in the not too distant future, investors truly see these places for what they are, and when they do, we will give them a very warm welcome.
Comments on this entry are closed.