Reflections From Institutional Investor’s Africa Conference

It is often difficult for opportunities in Africa to be understood by US investors. Notwithstanding the preponderance of data and evidence which suggests that Africa is on the cusp of a major developmental boom, it often seems challenging to explain that there is no better time to invest in Africa than today – except perhaps yesterday (or six months, or six years ago). Over the past decade, a composite of Africa’s markets have generated higher return than the S&P 500 and the MSCI Emerging Markets Index with less risk, as measured by volatility. It is sometimes hard to explain that the Africa of today is not what you might see in the headlines, or remember from years of sobering news reports. In fact, Africa is comprised of fifty-three unique nations, many of which have taken substantial and meaningful steps towards a prosperous future – and the numbers are there to prove it. That being said, attending Institutional Investor’s conference on investing in Africa this week was a truly enjoyable way to spend the past two days. The conference brought together institutional and retail investors, business leaders, diplomats, and statesmen to discuss investing in Africa. All we can say is that we liked what we heard. Truth be told, we at Nile were not surprised by much of what was said. We have been saying all along that opportunities abound in Africa, not only in natural resources (which are plentiful), but in infrastructure, consumer goods, telecommunications, agriculture, financial services, housing, healthcare, and education, just to name a few. There are substantial returns to be made in Africa, and we hope to be able to help investors participate in the opportunity. It would be possible to summarize what went on at the conference further, but we feel that many of the topics that were brought up deserve some real discussion. Therefore, we are going to hold you in suspense over the next few days, as we publish our thoughts on some of the biggest issues we believe were raised. Again, much of it may not surprise an investor who has been paying attention to Africa over the past few years, but it is likely to come as a shock to plenty of investors who have been looking elsewhere. As a preview, here are the titles of our expected posts over the next week – stay tuned for more, and thanks again for all the delegates who made the event a good one – see you all next year! 1. The ‘Infrastructure Tinted Lens’ 2. The Consumer Market – Just How Big is Big? 3. Moving Up the Value Chain 4. Risk management: Perception vs. Reality For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com. We know Africa - from Cairo to Capetown.

Nile Capital's Thoughts on the First Quarter of 2011

Nile Capital has recently published its results for the first quarter of 2011, and we wanted to share some of our thoughts. Below are some excerpts from the quarterly report - for the full version, please request a copy at info@nilecapital.com

Performance in Africa's markets for the first quarter was challenged by the effects of political unrest, most notably in Egypt and Tunisia. The Egyptian market was closed from January 27th to March 23rd, and re-opened significantly lower than its January levels. Investors were thus adversely impacted by the correction, and a significant portion of weakness in Africa in the first quarter can be attributed to Egypt. However, although the political upheaval in Egypt caused short term turbulence in markets, we believe the long term impact of an improved and more stable political system will be beneficial for long term growth.

Africa Region Fund Flows (%)*

Performance in Africa was also impacted by capital outflows from international markets, with stronger than expected US economic data encouraging investors to re-balance back to the US. As a result, fund flows to Africa turned negative in the first quarter of 2011 but have since rebounded from off their lows. Fund flows had been vastly positive throughout the previous 12 month period, with substantial growth in the second half of 2010. Nevertheless, we continue to believe that growth will remain slow in Developed economies, and that expansion in Emerging Markets (and Africa in particular) will remain significantly better than in the Developed world.

Overall, Africa's markets were mixed for the first quarter. Aside from Egypt and Tunisia, whose markets were down on political unrest, much of the Continent’s underperformance came from he larger markets of Nigeria and South Africa, where fund flows drove returns.

Outlook

We believe our investment case for Africa continues to be underpinned by both global and regional growth dynamics. Although Advanced economies have outperformed Emerging and frontier markets in the first quarter of 2011, we believe that their long term growth is constrained by large fiscal and budget deficits, and these economies will have to raise taxes or cut spending to improve their fiscal conditions. In addition, monetary policy pursuing low short term interest rates (or ‘quantitative easing’) and dollar depreciation as a method to stimulate aggregate demand will lead to capital outflows to Emerging economies in search of higher yielding assets. As a result of these policy measures, we continue to believe Advanced economies will experience lower long term growth. Although in recent months positive data has implied a better than expected recovery in the US, the IMF believes that Advanced economies overall will grow by approximately 2.4% annualized over the next five years.

On the other hand, Africa’s growth is projected to be in excess of 5.4 % annualized in the next five years according to the IMF. In fact, the IMF has projected that Nigeria (the second largest Sub-Saharan economy) will experience GDP growth for the next five years in excess of 7% annualized, with the potential to do even better on the back of sustained high oil prices. A number of African countries have pursued stable monetary economic policies, and have better fiscal balances and low leverage. We believe this macroeconomic background continues to support the case for investing in Africa’s stock markets. In addition, we continue to believe that demand for natural resources and agricultural commodities, the need for infrastructure investment, and growing consumer demand will continue to be drivers on the continent. If anything, we feel that recent weakness presents a compelling opportunity for long term investors to enter Africa’s markets.

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

We know Africa - from Cairo to Capetown.

*Chart sourced from EPFR

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 info@nilecapital.com. We know Africa - from Cairo to Capetown.

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 info@nilecapital.com

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 info@nilecapital.com

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 info@nilecapital.com

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.

So 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). Between 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 info@nilecapital.com

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

Nile Capital's Larry Seruma 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

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

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

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

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 communiqués 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

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

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

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

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.

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.

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.

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 its 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.