March 23, 2011

A Welcome Sign: Egyptian Market Resumes Operations

After closing in late January in the wake of political protests that eventually sparked a regime change, the exchange in Egypt re-opened today to strong – and predictable – selling pressure. The market, which had been closed for 38 market days (read our previous post about the closure here), fell nearly ten percent soon after opening, hitting a circuit breaker which caused trading to be suspended for 30 minutes. The market remained lower after re-opening, and individual stocks continued to hit circuit breakers throughout the day. To us, it is predictable that the Egyptian market will be down over the next few trading sessions, and will remain volatile for some time. There is understandably pressure from investors to pare risk as Egypt sorts out its political affairs, and we believe that the recovery in the market is likely to take time. In our view, the market’s recovery depends on the speed and nature of Egypt’s political and economic reforms, which will determine the course of the country’s economy in the medium and long term. We are however encouraged by the process thus far. On Sunday, a referendum was held on proposed constitutional amendments – among them limits to presidential terms and judicial supervision of the election process – which paves the way for an election this fall. Should the process continue to move forward smoothly it will help to restore confidence in Egypt’s market. Selling is also expected to vary between sectors, with firms that were strongly tied to the former regime facing additional pressure. Stocks related to consumer goods are thus likely to do relatively better, with those that are tied to political risk – for example Ezz Steel, whose chairman is being investigated for corruption – showing more weakness. In addition, we would expect to see firms with significant ex-Egypt exposure (of whom there are many listed on the Egyptian exchange) do relatively better as a whole in the short term. Because their operations are not necessarily highly dependent on the Egyptian market, their earnings often are not highly correlated to Egypt’s economic growth. In the long term, our thesis remains strong that Egypt has the potential for significant growth. As we wrote here, we believe that short term volatility is to be expected, but in the longer term macroeconomic conditions are likely to remain favorable. Egypt is a young country, and rising demand for consumer goods, banking products, and affordable housing continues to make it an attractive destination for selective, long term investors. For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or We know Africa - from Cairo to Capetown.

March 18, 2011

World Bank Economist: Africa on the Brink of a Takeoff

Today we came upon a great video post by Dr. Shanta Devarajan - the World Bank’s Chief Economist for Africa, which can be found here and which discusses why Africa is on the brink of a takeoff. The post begins by reiterating Africa’s strong growth before the financial crisis, and the positive impact that growth had had on poverty and development. What we found especially interesting (and we agree) is Dr. Devarajan’s claim that as a whole Africa has taken significant meaningful steps in the past decade to enact policy reforms which encourage growth. Even during the financial crisis when growth ground to a halt, Dr. Devarajan notes that even while developed countries were increasing deficits and nationalizing banks, African countries were largely going in the opposite direction, with some even accelerating reforms. These reforms have the potential to have some significant positive impacts on Africa’s growth. Dr. Devarajan also discusses the factors impacting Africa’s continued deficit of private sector investment – at 15% of GDP, he notes that private sector investment is about half the level in Asia. A large reason this is true is because Africa has significant infrastructure needs (which we should add, typically require significant public sector support). However, of the $48BN per year he claims are necessary to bring Africa to the level of Mauritius (which we agree is a good comparative tool), $17BN can be financed through improvements in policies and institutions. His example in this case is road transport. Interestingly, although the price of transport in Africa is extremely high compared to the rest of the world, the actual vehicle costs are not substantially different. Rather, he claims that lack of regulation and competition allows transport companies to achieve extremely high margins. For example, he notes that recent de-regulation in the trucking industry in Rwanda has helped to lower transport prices by 75%. He continues into impediments to agriculture, healthcare, and education which have been mitigated by corrections in government policies, and notes that continued reform could lead to sustained economic growth and policy reduction that compares to India 20 years ago, or China 30 years ago. Without a doubt, we agree with much of what he is seeing. A culture of reform and transparency is becoming ingrained in many African nations, and their economies and citizens are reaping the rewards. For example, the banking sector in Nigeria emerged from the crisis more transparent, better regulated and capitalized, and poised for growth (which we have already begun to see). We would encourage you to watch the video. For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or

March 15, 2011

Why is the Egyptian Market (Still) Not Open?

As headlines fade on protests in the streets of Egypt, investors remain wary of conditions in the country and its prospects going forward. Driving that concern is a key warning sign: the market has remained closed since the turmoil began. A closed market is a pretty clear signal that conditions are still not good, however we wanted to dig down into why the market has remained closed. First of all, many officials in the former government are being investigated for corruption. Because a number of these individuals are likely invested in Egyptian firms, there was concern over them hiding money or taking it out of the market before they could be investigated. Market officials have been cautious therefore in assuring that they identify whose funds should be restricted. In addition, all Egyptian companies were asked to disclose the impact of the riots on their business, which they have done. This was likely to prevent indiscriminate fire sales, where investors sell first and ask questions later. There was also concern that local brokers who were invested on margin would be disadvantaged when the market reopens. There have therefore been provisions put in place to give these brokers subsidies on their margin calls. Also, there was a desire to resume normal market operations when the government was more functional. Logically, the CEO of the Egyptian market should have the chance to know who is in charge of the country before the market resumes. In addition, it makes sense for the market to wait for normal banking to resume before markets reopen. That being said, we are somewhat surprised it has taken this long for Egypt to get its house in order. However, the rationale behind the closure does in fact seem justified. At this point it does little good to trust the date that is set for the market to re-open, however we do anticipate that it will happen soon. For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or

March 10, 2011

Africa: The Best Ground Floor Opportunity for Returns Over the Next Twenty Years

Recently, Nile Capital Management's Chief Investment Officer and Managing Principal Larry Seruma gave an interview with Wychick Investment Advisors' 'Dollars and Sense' Radio Show, in which he discussed the performance and potential of African markets. You can find the interview here under the third and fourth segments on February 20th, 2011. The interview was also mentioned in Wychick's biweekly newsletter, in which the opportunity for investing in African markets was favorably compared to the opportunities in China and Russia in the 1990s. From Wychick's Newsletter: "Back in 1995, Templeton Funds released two closed-end mutual funds; one invested in China (Templeton Dragon Fund - TDF) and the other invested in Russia (Templeton Russia Fund - TRF). As a relatively new broker at that time, I was actively looking for new investment opportunities to show my clients. Though today, with the benefit of hind sight, investing in Russia or China back then seems like a 'no-brainer'; clients sixteen years ago wanted nothing to do with these 'backwards, Communist, piddly go-nowhere economies'. Though the two Templeton funds have had many rough time periods - including the Russian debt crisis in 1998 and the Hong Kong transition - a $10,000 investment in the Russia fund would be worth $98 thousand today and a $10,000 investment into the China fund would be worth $162 thousand.

So with that as a back drop, I think there are some merits to Larry's fund. Having just completed my second visit to Africa (Kenya), I can tell you that there is a lot of activity going on there. Everyone has a cell phone; and since only 10% of Kenyans have a bank account, a common method of money transfer is to send credits from one cell phone to another - the recipient just goes into a local convenience store and collects the cash. Cell phone reception in the middle of the African veldt is better than it is between Bend and Portland, Boise or Reno. I could seamlessly draw money out of my U.S. bank accounts through African bank ATM's. I know of no other markets that are as underdeveloped as Africa; Thailand, Mexico, South America and Asia are at least one decade ahead of where Africa (with the exception of South Africa) is today - the point is, if you want a truly 'emerging market', Africa provides the best ground floor opportunity to potentially see some incredible returns over the next twenty years."

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or

March 7, 2011

Investing in Africa Can Reduce Risk in a Portfolio

This may come as a surprise to some, but including an African investment in a portfolio has the potential to reduce volatility. In fact, African markets add a new and different form of diversification within a global portfolio, which has been shown to reduce overall risk.

Diversification has long been known as a key for investors who are looking to minimize risk (take a look here for a great explanation). Investing in more than one security, sector, or region means that individual winner and losers in a portfolio can balance against each other over time. Although nobody can predict the market's performance, over time it has been shown that different assets do not necessarily rise or fall in sync. The adage of 'safety in numbers' is apt - were one investment to fall, you hope to have others whose performance is not correlated and who can prove protective in your portfolio.

This may not seem to jive with the high risk premiums investors ascribe to Africa, which are often driven by turbulent political conditions or underdeveloped capital markets. However, it turns out that because African markets have historically not been linked to the performance of other global markets, they can actually serve to decrease investment risk. In fact, because Africa is comprised of a number of individual equity markets which do not necessarily move together, the risk is likely to be lower than any other individual Emerging market.

Take a look at what an African investment could do for risk in a U.S. portfolio. Note: we make the assumption that the S&P 500 represents the average holding portfolio for most U.S. investors.

Allocation to Africa | Investing in AfricaSo imagine, for example, adding a 30% allocation to Africa in a portfolio (for the sake of argument, call 'Africa' a composite of South Africa, Nigeria, Kenya, Mauritius, Ghana, Egypt, Morocco, and Botswana). S&P Comparison | Africa InvestingBetween the end of 2001 and the beginning of 2010, the composite would have an annualized return of 8.85%, with a annualized standard deviation of 13.05%. This compares with the S&P alone, which would have lost 0.36% on an annualized basis, with 15.61% volatility. Perhaps not what you would expect.

Note: all data is from Bloomberg.

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or