February 28, 2011

Putting China’s Role in Africa in Context

At Nile Capital, we often find that investors’ interest in Africa is originally driven by a belief that China’s demand for natural resources will drive the continent’s growth. It is not uncommon to hear investors query whether an investment in Africa is just simply a way to increase exposure to the growing Chinese economy. We ourselves have written about China’s growing need for natural resources, (request a copy here) and the opportunity for investors in Africa to capitalize on Chinese demand. However, while China is undoubtedly an important part of Africa’s investment story, it is important to keep its role in context. We recently read an interesting article from Columbia University’s Vale Center on Sustainable International Investment which we thought was worth sharing.

First of all, the article points out that although there is a perception that China dominates Africa’s economies, about 90% of African FDI originates in the developed world (notably the United States and European Union). It also notes that simply focusing on Chinese investments in Africa misses an important part of the story, and that investments from other Emerging nations are significant as well. This is an interesting point to make. Articles like this one from Reuters have recently pointed out interest in Africa from Brazil, and similar flows are coming from across the globe. Thus, although China has established itself as a major headline-grabber, it is by no means the only country to notice Africa’s potential.

The article also notes that Chinese (and Indian) firms are not simply interested in natural resources. It points out that although on a capital basis natural resource projects still dominate, there are a wide number of investments taking place across a range of sectors, including “telecommunications, financial services, food processing, manufacturing, infrastructure, back-office services, and tourism.” This is an important point to note. As investors on the ground, we see a lot of opportunity in companies that invest in precious resources such as platinum, natural gas, coal, and gold. However, we are also finding compelling opportunities to invest in Africa’s rising middle class (see here and here for previous posts on this subject). As the Economist pointed out recently (see here), six of the top 10 fasted growing economies over the past decade were African, and seven of the top 10 over the next five years are expected to be as well. These are compelling numbers, and multinational firms are taking note. Thus, although China is and will continue to be a major player in Africa, they are only one small part of a larger story.

Material in this post was quoted from “Harry G. Broadman, ‘The backstory of China and India’s growing investment and trade with Africa: Separating the wheat from the chaff,’ Columbia FDI Perspectives, No. 34, February 17, 2011. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (http://www.vcc.columbia.edu/).

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

February 25, 2011

Nile Capital on Squawk on the Street

This morning, Nile Capital’s own Larry Seruma was featured on CNBC’s “Squawk on the Street,” where he debated the opportunity of investing in the Egyptian market (watch the interview here).

Of course, it’s never good to be the person pitching the opportunity in Egypt when the headline reads “Crazy to Invest in the Middle East?” and the video clips show footage of angry men with guns. However, we confess that we are not surprised at the perception of turmoil in the Middle East as a risky investment opportunity. We also confess that our favorable opinion of the Egyptian market remains unchanged.

Despite the headline, we agree with a good deal of what was said. First, there are going to be higher risks in Egypt (and the Middle East) in the short term. Without the benefit of foresight, it is relatively safe to say that when the Egyptian market opens, it will open to lower bids as foreign investors may sell Egyptian equities to rebalance risk in their portfolio and local investors sell to meet margin calls. In addition, we also agree that now would not be the time for a retail investor to look for quick profits in the Egyptian market. Time and again it has been shown that market timers are significantly more likely to get their predictions wrong than they are to get them right, and given that the average retail investor could not name a single company which trades in Egypt, jumping in now is not a good idea.

We especially agree that for a short term investment, Egypt is not the place. Aside from increased volatility, Frontier and Emerging Markets are often riskier because of the possibility of political unrest. This does not make them poor investments, but rather an opportunity for the long term. The situation in Egypt is opaque - there will be winners and losers over the next few weeks whose performance will not depend on fundamentals, but on emotion. So yes, as with any investment if you are looking to make fast money by riding volatilty, we can only wish you luck.

That being said, we are still firm believers in opportunities for the Egyptian market, for the long term investor. As we mentioned in a previous post (link), the Egyptian economy has a growing middle class which continues to demand more and better goods and services, and we believe now is an excellent time to invest in firms that are well-positioned to capitalize on that opportunity. Political unrest aside, when new bank account openings are growing by double digits every year or construction can hardly keep up with population growth, there is a place for investors to do well. It is all a matter of knowing where to look, and being willing to remain patient.


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

February 23, 2011

Opportunities to Capitalize on Egypt’s Emerging Middle Class

In the wake of recent political unrest in Egypt, there has been concern that the country will no longer be a safe or strong opportunity for investment. Although we agree that there will be short term challenges, we continue to believe that the long term opportunity for the Egyptian market remains strong.

Going forward, the biggest risk for the Egyptian economy in the short term will be increased volatility, and therefore a higher risk premium. We have recently seen short term interest rates in Egypt increase by over 200 basis points, and the government has indicated that it will increase public sector wages by 15% in the near term. In addition, the high cost of food was a firebrand for protesters, with inflationary pressure posing a significant long term risk. Insecurity over the nation’s new political and economic climate - as well as the rising cost of food - is likely to be a key driver of investors’ perception of Egypt as a destination for capital.

However, it is important to note that prior to the recent turmoil in Egypt, the country’s economy had been growing at a steady 5-6% per year for the past few years. This growth was spurred by a growing middle class, as well as economic liberalization. While regime change and political unrest may likely lead to a contraction in the short term, we believe that the fundamentals behind Egypt’s economy remain strong. There are 80 million people in Egypt, which makes it the largest economy in the Middle East by far. Growth in the country has also been driven by macroeconomic changes over the past few years, most notably liberalization of the country’s economy. It is likely that a democratic transition would accelerate this process, and foster a more participatory and lasting change.

When Egyptian markets reopen, we believe there is likely to be broad pressure to sell equities, as investors indiscriminately try to pare risk. We expect to see capital outflows in the short term from investors who are looking to reduce their exposure. This could in turn lead to domestic selling for high margin investors who face margin calls. Overall, this indicates that a near term drop in the Egyptian market is likely, but not necessarily an indication of long term fundamentals. As long term investors, we believe that favorable opportunities might develop as investors sell out of the market without regard for the underlying fundamentals. Of note, we would like to highlight a couple of sectors that we believe are well positioned for growth in the Egyptian economy going forward, and which we believe are compelling investment opportunities.

First, we believe there are good opportunities in the banking sector. Egypt, as with many countries in the Middle East and Africa, has an extremely low rate of penetration in banking, which means there is a significant potential for expansion into new and growing spaces. This growth is being targeted by a number of large financial firms, who are working to expand their small and medium enterprise and retail banking segments. With such low penetration, may financial firms have found it possible to grow these segments by double digit rates annually while maintaining strong fundamentals.

In addition, we consider the affordable housing sector to be an excellent opportunity for growth in the Egyptian market. First of all, Egyptian housing is by its nature a long term story. Over 60% of Egypt’s population is currently under the age of 30, which makes affordable housing a significant concern. At this point, demand for affordable construction far outstrips supply, and is likely to continue to maintain strong growth in coming years.

In addition, changes to the mortgage finance industry have the potential to notably spur demand. Traditionally, Egypt has not had a mortgage finance industry: rather, homebuyers would make purchases on a cash basis. This meant Egyptians who hoped to purchase a home were forced to wait until they had saved the full cost prior to making a purchase. However, ongoing changes in Egyptian regulations have begun the development of mortgage finance products. If demand for these products continues to grow (as we believe it will), an increasing number of individuals will be able to afford their own homes. Firms which construct affordable housing are well positioned to capitalize on this opportunity.

Overall, we agree that there will be weakness in the Egyptian economy, especially in the short term. However, there is a strong growth story in the Egyptian economy –driven by the expansion of the middle class - which we believe continues to make a number of Egyptian firms attractive buying opportunities.

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

February 22, 2011

The Impact of Libyan Protests on Global Markets

Over the weekend, investors have shifted concern over tensions in the Arab world to Libya, where protests over the long time rule of Col. Moammar Gadhafi have caused increasingly violent government crackdowns. Investors in energy markets have shown particular concern, as Libya is the first major oil producing state to face the possibility of a new regime. Although Egypt is a major conduit for Libyan oil, it is not itself a major oil producer, nor is Tunisia. Libya on the other hand produces 1.8 MN barrels of oil a day, and recent tensions have caused oil prices to climb.

Although news from Libya appears to have rattled markets globally, it is important to keep the true impact of the protests in context. Although Libya is a net exporter of crude, it is only the 17th largest source of oil globally, with no direct exports to the United States. Thus the concern from investors that Libya could cease to contribute to oil production seems overblown. Not only does Libya represent a relatively minor percentage of production, but OPEC and other oil producing states could absorb the deficit by increasing their own production. This also assumes a full stop of Libyan exports, which is unlikely. Finally, should all Libyan exports cease and excess capacity not be absorbed, it is should be noted that the International Energy Agency has over 1.6BN barrels (the equivalent of about six months of U.S. imports) of reserves which can be tapped should global production contract.

The true concern is therefore not Libya so much as the fear of contagion to other Arab states, notably Iran, and potentially Saudi Arabia. While we do agree that political risk in the Middle East will remain elevated, we believe an increased risk premium could actually benefit the African continent in the long term. Heightened political risk across the Arab world serves to exacerbate concerns among investors that oil production remains overly concentrated in a small number of potentially turbulent states. At the same time, a number of nations – many of them in Sub-Saharan Africa – have identified potential oil reserves which have yet to be tapped. As the risk premium for oil rises in the Middle East, interest in diversifying production will rise, as will the willingness of investors to commit capital to projects across Africa.

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

February 17, 2011

Nestle’s Growth in Emerging Markets Remains Strong, Offsets Commodity Costs

Food giant Nestle posted strong results today, reporting 6.2% organic growth for the year – largely above forecasted results. In particular, growth in emerging markets came in at a strong 11.5%, which the Company’s earnings release notes “underlines the increasingly important role they will play in the future.” This is particularly notable when compared with 5.7% growth in the Americas, and 3.7% in Europe.

The Company did note that there were likely to be headwinds in 2011 from a rise in commodity prices, but that strong Emerging market demand would help offset some of the costs. For more details read here, or read Nestle’s press release here.

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

February 16, 2011

Reactions to Comments by a Diplomat Based in Egypt

This morning, we were able to join a conference call with a Diplomat based in Egypt in which the Diplomat discussed the situation in Egypt and challenges for the country going forward. The Diplomat's comments were optimistic but cautious, noting a number of positive elements of the transition, but warning that the transfer of power would take time.

The Diplomat began her comments by noting that the process of regime change in Egypt was in its early stages, and that the nation would face enormous challenges. However, she pointed out that Egypt has established, durable political structures, and there seems to have been a commitment to responding to the economic disenfranchisement which encouraged protestors to take to the streets. She emphasized that although the army has assumed control of the government, this was not a coup, and military leaders appear to intend to relinquish power as soon as is realistically possible. She also noted that the military has been sending out communiqu├ęs noting basic elements of what citizens should expect, including the honoring of all domestic and international legal obligations –a major sign of continuity-, the dissolution of parliament, a rapid constitutional amendment process, and free and fair elections in approximately six months.

The Diplomat noted that protesters seem to have confidence in the commitments of the military at this time, however they intend to rally every Friday in order to remind the government that crowds can still be brought to the street. Most likely the next issue in the short term will be labor actions, which will focus on demands for higher wages and greater use of permanent labor terms (in lieu of temporary or contract work). During the protests, the Egyptian government promised a 15% raise to public sector employees, which has engendered demands for similar treatment from the private sector.

In terms of next steps, the Diplomat was cautious in making predictions. She noted that the army did not appear to want to remain in power, but noted the balance between getting things done sooner rather than later, versus taking time to do it right. A telling indicator in the short term will be whether the military is willing to allow sufficient political space to opposition groups for the process to occur.

From an economic standpoint, the Diplomat discussed the challenges faced by the tourist industry and concerns over unemployment, but really did not delve into economic growth during her comments except to note that there is a deep bench of respected Egyptian technocrats that are likely to be able to step in and assist. However, during the Q&A she was pressed for deeper responses about the economic climate and business dimensions of the revolution. One particularly interesting insight was the question of which part of Egypt’s history will come to bear on economic policy. Although the last few years have been dominated by the adoption of free market liberal reforms, there is a sense that much of the country’s success failed to trickle down to its people. In contrast, previous economic policies have focused more on nationalistic policies (home grown industries, for example), and arguably did a better job providing basic services (better schools, higher wages) than recent economic policies have. However, she noted that this period was a disaster, and sent the economy into a downward spiral. Although that was the case, she pointed out that while ministers at a senior level realize that market based reforms should persist, there may be elements that will espouse a more populist view.

However, in terms of business investment the Diplomat seemed optimistic. She noted that there have been no indications from the military which suggest that international investment is anything less than welcome, and although it is difficult to predict the future economic climate, it seems relatively positive.

Finally, the Diplomat made a point of emphasizing the need for countries to respond to the demands of their youth populations. She cautioned that the ‘old ways’ may no longer work for leaders, especially when their people do not feel like their needs are being met. She emphasized that listening and responding to what people are saying goes a long way, and that leaders need to be get in front of their people and respond to what they are being told.

From our perspective, there are a few interesting issues to be gleaned from these comments (which also focused on the role of the US government and its involvement in the forthcoming months):

First, the Egyptian revolution appears to be a positive catalyst. It removed a ruler who had governed for decades, failed to prevent corruption, and did not respond to the needs of his people. Although the future is anything but clear, Mubarak’s departure has cleared the way for a healthier, more open political process to occur. This transition will by definition include more voices in the political process, which will in turn encourage the government to respond to the needs of a wider segment of Egyptian society.

Second, the economic and business climate remains uncertain, but is not likely to take a notable downward spiral. Although we agree that there is a need to assure that people feel that they benefit from economic growth, there seems to be a consensus that reforms which encourage that growth are necessary in the long term. Populist pressure will exist, but in fact there is an opportunity for officials to promote businesses which can more effectively serve the needs of the people. For example, businesses which provide inexpensive and good quality consumer goods such as food, cell phones, cleaning products, and transportation are likely to play a large role, especially as there will likely be an emphasis on improving the average standard of living of the Egyptian people.

Third, contagion to other countries in the Arab world is still possible, and no situation is the same. The Diplomat was careful to point out that each country has its own set of issues, and there was no categorical way to predict how things will play out. At this point, protests of varying severity have spread across the Arab world. Although difficult to compare, frustration over corruption and inclusion in the political process have dominated. To a degree, much of the unrest stems from the cost and availability of food and other consumer goods, which again reinforces the need to provide quality, cost effective products and services. In the face of rising food costs, this will become increasingly important.

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

February 15, 2011

China Wins $1.2BN Contract to Build Airport in Sudan

According to a Reuters article found here, a subsidiary of the Chinese Communications Construction Company has won a contract to build a new airport in Khartoum, the capital of Sudan. The contract, which is worth approximately $1.2BN highlights the link between China and Sudan, who has in recent years faced sanctions from much of the world as a result of its human rights practices. The country, which voted in a referendum to split into two independent nations this summer, is a major exporter of oil to China (its sixth largest source of imports in 2010). China has noted that it hopes to maintain its relationship with governments in both the North and the South following the official split.

For previous posts regarding Sudan's split, see here and here.

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

February 14, 2011

New Consumer Preferences Mark Rise of Middle Class

The Wall Street Journal today profiled the growth of Zambeef Products, a meat and produce company which has been growing substantially on the wake of Africa's rising consumer class. The article notes that as the middle class in Africa grows, so too will the demand for goods and services that cater to their needs. Zambeef offers clean packaged products which compete with open-air markets, and has found that consumers are frequently willing to trade up in price for better quality beef.

The article also notes that corruption and infrastructure remain challenging, with the firm often taking power generation into its own hands. The firm also mentioned plans to invest $8MN in Nigeria over the next eight years, on top of the $2MN it has already put into the country. Already the company earns over $90,000 per week in the Nigerian market.

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

Investing in a Post-Mubarak Egypt

The Wall Street Journal this morning has reviewed the possibilities for investors in Egypt following the country's popular uprising and regime change. The artice, found here, notes that the resumption of trading in Egypt is likely to be chaotic, and investors should remain aware of the risks investment in Egypt may pose. Of note, the article points out that the nature of the regime change is far from certain. Although a democratic transition and strong leadership could herald a period of growth for the country, the uncertainty in the short term is likely going to hurt the Egyptian economy. On the other hand, the article points out that a successful regime change in Egypt could engender further revolutions in nearby Arab countries, which could in turn contribute to volatility in the region.

The article also mentions Nile Capital, noting: "Manager Larry Seruma said he is optimistic that Egypt's middle class will be a catalyst for economic growth, and that the country's financial markets will become more transparent."

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

February 8, 2011

Newmont Mining Corporation Expects to Double Gold Production by 2015

According to an article in Reuters, Newmont Mining Corporation expects to more than double its gold production by 2015, from 500,000 to about 1.2MM ounces per year. The firm expects the expansion to be driven by its projects in Ghana, where it plans to invest up to $1BN in its Akyem project. The firm also has operations in the Ivory Coast, Mali, Burkina Faso, and Guinea.

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

Chinese Appetite for Natural Resources Still Growing

According to comments made at an African conference on mining, China's appetite for natural resources could quite easily grow. Kobus van der Wath, MD at consultancy Beijing Axis noted that China currently has outbound investments of over $50BN, with the ability to invest more, particularly in Africa. According to van der Wath, Africa drew 14% of China's investment last year.

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

Japanese Government Plans to Invest ‘Billions’ in Africa

In an effort to catch up with China for influence on the African continent, the Japanese vice minister of economy, trade and industry recently announced that the country was looking for investment opportunities across the continent. Japanese investments are expected to come via the country’s state owned oil and mining firm, or via joint ventures with local African businesses. The minister also noted that Japan was interested in developing Africa’s infrastructure in tandem with investments in extractive industries. Read here for more information.

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

February 7, 2011

WSJ: Major Gas Field Found off Mozambique

Natural gas producer Anadarko Petrolium Corp has announced a new discovery off the coast of Mozambique, according to an article in the Wall Street Journal. The find is one of a number of recent deepwater discoveries in the area, and makes it more likely that additional, undiscovered reserviors are located nearby. According to the Journal, the field could be "ideally placed to supply Asian natural-gas markets by the middle of the decade."

Central Bank of Kenya Issues First 30-Year Bond

The Central Bank of Kenya has successfully issued its longest term bond to date, further deepening the country's fixed income market. The sh18MN bond was issued at 12%, and will pay interest twice yearly. It's 30 year term is the longest ever by five years, and topples the former record holding 25 year bond which was issued in July 2010.

February 4, 2011

Rwandan Brewer Bralirwa Jumps on Market Debut

Shares of Rwandan Brewer Bralirwa jumped this week following their listing on the country's new Exchange on Monday. The firm was brought to the public markets as part of the sale of the Rwandan government's 30% stake - 25% in an initial offering, and 5% to Heineken, who already owned the remaining 70% of shares.

The listing represented the beginning of Rwanda's new Exchange. The country plans to list additional firms over the coming year, starting with the expected IPO of Banque de Kigali in the first half of the year.


For more information, please see here and here.

February 3, 2011

Airlines Expand African Investments

An article in Businessweek today highlighted the growth potential in Africa for airline companies looking to expand their market share, noting that a growing oil and gas business has swelled demand for air travel. According to the article, airline giant Lufthansa "predicts air-travel demand in Africa will increase an average 6 percent annually until 2025, helped by a burgeoning raw-material industry and a growing middle class." While political risk is cited as an issue, the article also notes that airlines are showing a willingness to move forward because of the high potential rewards from the investment.

Nestle to Invest $1BN in Africa Over Next Two Years

Consumer giant Nestle has announced its intention to invest $1BN in the African continent over the next two years according to an article in Reuters. The comments, made by the firm's Chief Executive at the opening of a factory in Nigeria (the firm's 27th in Africa), highlight the continued trend of large consumer goods hoping to expand their presence in the African market in order to tap into continent's growing consumer base.

East Africa Community Launches TradeMark East Africa Initiative

The East African Community officially launched an initiative on Tuesday which is aimed at reducing transportation and related costs, and developing a network between their economies to promote economic integration and trade.

More information about the initiative - dubbed TradeMark East Africa - can be found on their website here.

Ratings Agencies Lower Egyptian Outlook in Face of Turmoil

Fitch Ratings has downgraded Egypt's long term currency rating to BB from BB+ today, based on the high chance of volatility in the transition to a new government. According to Richard Fox, head of Middle East and African ratings at Fitch, the rating reflects the gap between the demands of protestors and the government's position on reform and the risks associated with the likely transition.

Fitch had previously lowered Egypt's outlook on Friday, adding a Negative watch to it's BB+ assessment. Moody's also cut ratings on Monday, with Standard and Poors following on Tuesday.

February 2, 2011

Investors Pour into Egyptian ETF

An interesting investment story about Egypt is developing, as chronicled here on SeekingAlpha and here on Investment News Daily. The article describes the Market Vectors Egypt ETF (EGPT), which last week held around $11.7MN in assets. The Fund continued to accept assets on Friday, although Egyptian markets were closed and it's value was dropping precipitously (see prior post here), and found itself on Monday with about $12MN in cash.

Political Risk and Investment Opportunities in Africa

An article on Market Watch today highlighted the impact of investing in Egypt on Emerging Market portfolios. The article, which quotes Nile Capital's Larry Seruma, highlights the fact that political risk remains a major factor in Emerging Market investment.

The article also highlights the importance of distinguishing individual markets and opportunities within the Emerging space. Seruma again notes that political risk helps to differentiate countries and markets, and has the potential to limit the correlation between market opportunities. For example, he notes that although South Africa and Egypt have similar socioeconomic demographics, governance and their treatment of the poor vary notably. This of course has a significant impact on the health of the government, and by extension the markets.

An interesting article in the Wall Street Journal makes a similar point. The article discusses the potential for contagion from the Egyptian crisis, cautioning that investors have "poured money indiscriminately into emerging-market assets," and that there is a risk that Egyptian unrest could engender wider market risk. While the article cautions that political unrest may spread, and oil and food prices could rise, it also makes the important point that "contagion will have winners as well as losers," and "one lasting impact should be greater discrimination between emerging-market countries."

The point can not be made more clearly that investing in Africa or Emerging Markets should not be looked at as simply one opportunity. Although there is a correlation between the African markets, political and economic factors serve to draw individual opportunities away from the pack.

World Bank Claims Africa Better Prepared for Jump in Food Prices

Good news from the World Bank this week, as their Vice President for Africa Obiageli Ezekwesili noted that better investment in agriculture paid dividends in 2010. The price fluctuations and insecurity of 2008 and 2009 - and the protests which followed - seem less likely this year, as investments in infrastructure and farming technology have boosted productivity growth to three percent per year (from less than one percent previously).

For more information, read here.



Demand for African Cement Grows With Infrastructure Needs

Africa's cement manufacturers are expecting a boom of construction activities, as growth in infrastructure development projects reinforces demand for cement production.

Cement producers plan to gather in Kenya on March 8th and 9th to discuss growth opportunities, logistical challenges, financing, and production standards. The conference should provide further insights into the competitive landscape, and prospects for growth in the industry. More information can be found here.