Africa Poised for ‘Explosive’ Frontier Market Growth: Consultant Advises 1-2% Overall Allocation

In an article found here Asset International magazine (a subsidiary of PlanSponsor) notes that Africa “may provide some of the most robust investment opportunities for funds.” The article notes that investment plan consultants have been strong supporters of investment opportunities in the continent, and quotes prominent consultant Adam Tosh saying that “over the next five years, exposure to Africa should make up 1-2% of a total investment portfolio.” The author also highlights a previous article which recommended that “institutional investors look to smaller emerging markets to boost returns.” The earlier article pointed to research begun in January 1997 which found that that a basket of non-BRIC emerging markets had outperformed the BRICs by 39%. A similar story exists for Africa. As you can see here, a composite of some of Africa’s largest stock exchanges has significantly outperformed other emerging markets over the past decade, while a providing a lower standard deviation of returns. Thus, the opportunity for investment in emerging markets beyond the BRICs – notably Africa - is compelling both on a pure return basis, as well as from the standpoint of added diversification. 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.

Financial Times: Africa Ripe for Reappraisal

An article published yesterday in the Financial Times (available to subscribers here) has one again highlighted the opportunity for investing in Africa. The article notes that after rebounding from the financial crisis, “sub-Saharan Africa is increasingly viewed as an opportunity rather than a burden.” For example, the article quotes a bank executive attending the World Economic Forum in Cape Town, who noted that “whereas a decade ago such meetings focused on aid and AIDS, the conversation was now about investment and growth.” The article highlights the importance of natural resources for Africa’s growth, as well as interest from other emerging nations: “Growth has been spurred by market liberalisastion and improved public management of finances as well as a boom in the commodities that Africa has in abundance. Perhaps the biggest factor has been the engagement of emerging powers including India and Brazil but led by China. Asian demand for African resources has engendered a revival in the terms on which the continent trades.”

However, the article points out that natural resources are only a part of the story for investors who see opportunity in Africa, noting: “The story is no longer just about resources. The commodity price surge has coincided with the rapid expansion of banking, telecommunications and other services formerly weighed down by the dead hand of the state. This and the sluggish pace of recovery in the developed world have encouraged investors from elsewhere, including Europe and the US, to look at Africa with different eyes.” In addition, the article highlights the consumer growth story (which we have discussed previously here and here, noting that: “Consumer spending is also rising at more than twice the rate of developed countries. The phenomenal growth in telecoms has pointed to a market that few consumer groups and service industries had thought about much before – and one that, if North Africa is included, now exceeds 1bn people.” In fact, the article cites a recent research report by management consultancy A. T. Kearney, which noted that executives at packaged goods companies should no longer be thinking about whether to enter the region, but where and how they should do so. For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 info@nilecapital.com. We know Africa - from Cairo to Capetown.

Nile Pan Africa Fund Assesses Its First Year Performance, Points to Low Correlation With Other Indices

For a full copy of our shareholder letter, please email us at info@nilecapital.com

In its letter to investors, Nile Capital Management (NASDAQ:NAFAX) advisor to the Nile Pan Africa Fund, believed to currently be the only actively managed mutual fund that focuses exclusively on the continent of Africa, provided a review of the Fund's first year of performance and portfolio characteristics. The firm also drew attention to the launch of its investment blog Money Watch Africa, which provides commentary and analysis of the investment landscape and opportunities in Africa.

"We are pleased to report that the Nile Pan Africa Fund not only outperformed the MSCI Frontier Markets Index during its first year of operation, but also showed low monthly correlation to the index and what we believe is an attractive risk profile. We believe these characteristics make the fund a compelling investment tool for investors who are looking for deeper diversification of their global portfolios," said Larry Seruma, the fund's manager and chief investment officer of Nile Capital Management.

From its inception on April 28th, 2010 through April 30th, 2011, the Fund gained 22.07% annualized. During the same time period, the MSCI Frontier Markets Index gained 9.94%, the Dow Jones Africa 50 Titans Index increased 11.07% and the S&P 500 Total Return Index advanced 16.67% annualized.

The Fund also showed low monthly correlation to the S&P 500 (0.72) as well as the MSCI Frontier Markets Index (0.48). The Fund's annualized standard deviation (based on monthly returns) was 16.77% -- lower than the S&P 500 (18.09%) and MSCI Frontier Markets (17.21%), indicating a favorable risk profile for the Fund.

Nile Capital believes that the fund's first year results bolster the case for investing in Africa and the firm's active management approach to investing in the continent based on fundamental research on the ground.

"While growth in developing nations is slowing down, Africa's growth is projected to be in excess of 5% through 2015, yet it continues to be an under-researched and under-invested region. We believe our on-the-ground research adds value by uncovering attractive investment opportunities, while managing the risks," added Seruma.

About Nile Capital Management, LLC

Nile Capital Management, the Advisor to the Nile Africa series of funds, is a New York-based asset management firm with in-depth investment expertise that covers the entire African continent, from Cairo to Cape Town. By focusing on Africa, the company seeks to identify and capitalize on the best investment opportunities in the continent and expand investors' access to emerging/frontier markets. Additional information is available at www.nilefunds.com.

Nile Pan Africa Fund (NAFAX) Performance, April 2011
As of April 30, 2011. Inception Date is April 28, 2010.

The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. As stated in the current prospectus, the Fund's total annual operating expense ratio (gross) is 4.17% for Class A shares. The Fund's investment adviser has contractually agreed to reduce its fees and/or absorb expenses of the fund, at least until July 31, 2011, to ensure that the Total Annual Fund Operating Expenses After Fee Waiver (exclusive of any acquired fund fees and expenses, borrowing costs, taxes and extraordinary expenses) will not exceed 2.50% for Class A subject to possible recoupment from the Fund in future years. Please review the Fund's prospectus for more detail on the expense waiver. Results shown reflect the waiver, without which the results could have been lower. A Fund's performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. For performance information current to the most recent month-end, please call toll-free 1-877-68-AFRICA.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Nile Pan Africa Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 1-877-68-AFRICA. The prospectus should be read carefully before investing. The Nile Pan Africa Fund is distributed by Northern Lights Distributors, LLC member FINRA. Nile Capital Management, LLC is not affiliated with Northern Lights Distributors, LLC.

Mutual Funds involve risk, including possible loss of principal. Because the Fund will invest the majority of its assets in African companies, it is highly dependent on the state of the African economy and the financial prospects of specific African companies. Certain African markets are in only the earliest stages of development and may experience political and economic instability, capital market restrictions, unstable governments, weaker economies and less developed legal systems with fewer security holder rights. Adverse changes in currency exchange rates may erode or reverse any potential gains from the Fund's investments. ETF's are subject to specific risks, depending on the nature of the underlying strategy of the fund. These risks could include liquidity risk, sector risk, as well as risks associated with fixed income securities, real estate investments, and commodities, to name a few. Non-diversification risk, as the Funds are more vulnerable to events affecting a single issuer. Investments in underlying funds that own small and mid-capitalization companies may be more vulnerable than larger, more established organizations.

Dow Jones Africa Titans 50 Index: Measures the stock performance of 50 leading companies that are headquartered or generate the majority of their revenues in Africa. Stocks are selected to the index by float-adjusted market capitalization, subject to screens for size and liquidity.

Standard Deviation: Measures the degree of variation of monthly returns around the mean (average) return. The higher the volatility of the investment returns, the higher the standard deviation will be.

Correlation: Measures how closely the investment tracks an index.

The S&P 500 Index: An unmanaged composite of 500 large capitalization companies. The index is widely used by professional investors as a performance benchmark for large-cap stocks.

The MSCI Frontier Markets Index: A market-capitalization weighted index of 26 emerging market country indices.

You cannot invest directly in an index.

Wall Street Journal Highlights Africa’s Growing Middle Class

An article in the Wall Street Journal yesterday (found here) highlighted the growth of Africa’s middle class, and notes that in terms of size, as a whole the middle class is on par with that of India and China.

The article notes:
Over the past decade, the number of middle-class consumers in Africa has expanded more than 60% to 313 million, according to a new report from the African Development Bank Group. The study—one of the first efforts to document the contours of Africa's emerging consumer class—brings into focus a potentially huge and enticing frontier market for global investors.
The article includes the below chart from the African Development Bank Group (ADBG), which shows growth in the middle class, and the share of each of Africa’s countries that considered a part of that class.

The ADBG notes that the middle class in Africa – those who make $2 to $20 per day - represents about 34% of the overall population, or about 313 million people. This compares with around 196 million middle class individuals a decade ago.

The article also makes an interesting note about how the researchers documented the emergence of the middle class. Statistics were gathered from car dealerships, airlines, mobile phone companies, and even private schools in order to estimate the size of the middle class. At Nile, we have someoneare on the ground in Africa on a regular basis looking at companies, sizing up trends, and seeking opportunities for investment. Unlike developed markets, this on the ground research is crucial in finding and understanding compelling investments, and we believe our experience gives us a competitive edge. Second, the researchers highlighted a key point about a growing consumer class – it comes in tandem with more discretionary purchases. As with any consumer, when someone in Africa finds him or herself with more income, he or she will choose to buy more (and better) goods. However, Africa is a highly segmented market, with notable differences in tastes and preferences across the continent, and even within individual countries. Thus, we constantly seek to understand where the new members of the middle class will choose to spend their funds – and invest in those opportunities.

In addition, the article notes that “the data paint a picture of a continent on the move, thanks to more open markets and a greater degree of political stability. New jobs—instrumental in China's and India's growth and urbanization—are spurring migration to cities and Africa's wealthier countries.” We have seen this as well, and would point out the recent McKinsey report which noted that 40% of Africa’s population lived in cities in 2010. In fact, in 2010 there were 52 cities in Africa with over one million residents – more than in North America and India, and the same as in Europe. These cities serve as natural entry points for firms seeking to expand their market share in the continent.

These observations are similar to what we have written about the African consumer market (see our article here) which we see as an incredible opportunity for long term investors.

Of course, it is also important to point out that although there are significant opportunities across Africa, they range widely across the continent. As shown in the graphic above, there are countries where over 2/3 of the population is middle class, and countries where less than 1/3 is. Thus it is important to view each of Africa’s nations as a distinct investment opportunity, some of which are more compelling than others. Being aware of the differences – and able to selectively invest across the continent – presents investors with a compelling opportunity.

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.

The Economist: Mixed Perception of Chinese Investors in Africa

In an article in the Economist over the weekend (read here), the magazine profiles the less-than-favorable perception among many Africans of China's investments in their economies. The magazine notes that “once feted as saviours in much of Africa, Chinese have come to be viewed with mixed feelings—especially in smaller countries where China’s weight is felt all the more. To blame, in part, are poor business practices imported alongside goods and services.” The article points out that construction projects which are completed by Chinese firms – often a ‘tied’ requirement for low cost Chinese loans – are frequently of low quality. Also, labor practices among Chinese firms are frequently perceived as corrupt or draconian. The article notes that the political backlash in many African nations has been significant, with many African leaders pushing for greater scrutiny and improvement of practices. However, it also quotes a former senior official at the African Development Bank who claims that “more Chinese have come to Africa in the past ten years than Europeans in the past 400.” We had noted previously that China was undoubtedly going to remain a major player in Africa, although we see other Emerging nations in particular as working to expand their role. However, as we mentioned in a recent article Africa’s governments are becoming more sophisticated in their ability to negotiate with foreign investors, with many recent contracts requiring infrastructure investments and local employment as a condition of new deals. Ironically, these infrastructure projects have been one reason for the recent influx of Chinese workers in the Continent, and have in some cases led to greater scrutiny of their business practices.

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.

Production in Africa: Moving Up the Value Chain

In our continued effort to distill what was discussed at the African Investment Conference put on by Institutional Investor Magazine, we wanted to highlight the emphasis which was placed on Africa’s potential for moving up the production value chain. In many cases, African economies can be (often falsely) perceived as dominated by natural resources or agricultural products alone. Although this perception is often overstated, it is true that commodities and agriculture remain the majority of Africa’s exports to the remainder of the world. However, there is enormous potential for investment in productivity and technology that could transform the composition of a number of African economies. To us, this process has already begun in many countries and sectors across the Continent, as savvier governments, growing economies, and more capital and expertise have made it possible for movement up the ‘value chain.’

Briefly, the ‘value chain’ is the idea of bringing raw or unfinished goods closer to a final, finished product. In each step of this process, the value of the good which is produced (and therefore the price for which it is sold) increases, often substantially. For example, in the production of a cotton shirt, a number of steps must be taken for raw cotton to be transformed into a finished product:

Raw Cotton -> Processed Cotton ->Thread -> Fabric -> Shirt

This (simplified) diagram demonstrates a basic value chain. In this example, raw cotton would be sold at a price which is significantly lower than processed cotton, et. cetera, with companies profiting at each step from the improvements they make. Thus, a company which processes cotton will buy raw material, and sell an improved good for a profit. Industries which are built on bringing goods up a step in this process often provide higher paying sustainable jobs, economic growth, and increased profit potential, as well as help diversify an economy away from basic materials into more ‘value add’ industries.

In terms of Africa, we see a great deal of potential for movement up the value chain. As we mentioned before, Africa is a major producer of a number of raw goods, which are often exported to other countries for improvement. This is problematic for a number of reasons: for example, the value which is added during the processing of a raw material is lost if the processing happens abroad, as are the highly skilled (and higher wage) jobs this processing requires.

Although each country is unique, Africa as a whole has been historically perceived as a poor place for investment in value added processes or vertical integration. In many cases, a history of corrupt governance, coupled with low levels of expertise and limited infrastructure have often made it difficult for business ventures to be successful, which has made investors wary of allocating capital to the region. In addition, domestic demand for many goods and services has historically been too low to justify the development or relocation of production facilities.

However, we believe that the historical view of many African nations’ potential for value addition should be revisited, as a number of catalysts have been developing which makes investment in these sectors more compelling. First and foremost, it is important to note that, in many cases, governance has improved substantially. Improvements in macroeconomic stability and the legal framework have often made the climate easier for businesses to be successful on the continent.

In addition, governments have become more sophisticated in negotiating deals with firms that are bidding for local contracts. In previous years, Africa’s natural resources were often extracted by foreign firms, which would remove raw goods from the continent and improve them elsewhere. However, in more recent years, governments have begun to require that extractive firms add infrastructure or value-add components to their bids for contracts. For example, as you can see in the chart below from McKinsey, from 1991-2000 only 1% of Africa’s largest resource deals had a component which included investment in infrastructure or industrialization. In contrast, that number grew to 9% between 2001 and 2005, and had risen to 23% in the period from 2006 until 2010.

In addition, as industrialization increases the availability of better jobs in Africa, it also signifies the expansion of the middle class, creating greater domestic demand. This cycle reinforces itself, and as the African consumer class grows (and urbanization facilitates entry points in the retail market), demand for domestic production will grow as well.

So again, we return to what this means for how Nile looks at investing in Africa. We believe that there are a number of opportunities for selective investors to capitalize on the growth these catalysts will create. First, and perhaps most direct, there are gains to be made by investing in companies who are on the forefront of this trend. For example, firms that are investing in goods and services which satisfy growing domestic demand could have substantial potential. We seek to identify industries and firms which are investing in sectors where growth will be strong. This could include firms which are producing goods for export, but we also see potential in companies which are looking to capitalize on Africa’s growing consumer class (read more here).

However, there are also a number of opportunities for less direct investments which could capitalize on this trend. We had previously written about investing in infrastructure firms (read here), which we see as one of the key opportunities in Africa at this point. A firm which is able to provide infrastructure needs such as power and transportation makes it easier for these ‘value add’ sectors to develop and grow. In addition, opportunity may be found in financial firms which provide capital for emerging firms and industries to grow. These financial institutions tend to have a good local knowledge base and may generate substantial profits in tandem with the companies they fund.

As Africa’s infrastructure improves and its demand for more and better consumer goods continues to grow, we continue to believe that the opportunity for investment in the Continent remains substantial, and we are actively seeking ways to invest in companies that are well positioned to take advantage of it.

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.

African Opportunity: More Than Just The Headline Names

Last week, Nile Capital’s Larry Seruma was quoted in an article in the New York Times entitled “At Opposite Ends of Africa, Fear and Confidence in Markets,” which compared and contrasted opportunities for investment in Egypt and South Africa.

We found this dichotomy very interesting and insightful. However, as specialized Africa investors, we would like to caution against looking at African investment opportunities as existing in these two nations alone. There is no doubt that South Africa and Egypt are the economic powerhouses of the continent, and on a market cap basis account for a substantial majority of the public equity listings. Yet Africa is a continent with 53 countries, a number of which have active exchanges. An investor who limits his or her exposure to South Africa and Egypt would be similar to an investor who only considers New York and California when looking for opportunities in the United States. We at Nile take seriously our claim of being a ‘pan-African’ investment firm. Our Africa knowledge base spans the geography from Cairo to Capetown: that includes everything in between. You can see from our most recent Fund Fact sheet that while South Africa and Egypt are two of our higher exposures, they are by no means the only places we see opportunity. In fact, many of the less well known opportunities may have greater long term potential for growth. Thus, although we understand the emphasis on Africa’s largest markets, we want to be sure that investors don’t believe that they are the only places where opportunities can be found. We have previously written about the turmoil in Egypt (read here), noting that investors should consider more than the headline risk when considering exposure to Egypt. We remain confident in our thesis that there is opportunity for a selective manager to do well in the Egyptian market. As we have said before, political turmoil in the Middle East could be seen as a buying opportunity for a long term investor both because of indiscriminate, fear-based selling, and the possibility that improved governance will be a positive in the long term.

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.

The Consumer Market In Africa – Just How Big is Big?

To many, Africa is perceived as a place full of poverty, with its residents scratching out a living and barely feeding their families. Although poverty is a significant and real concern in many parts of Africa (as well as Emerging markets as a whole – and the United States for that matter), Africa also has a robust and growing consumer class which, according to McKinsey, had a combined spending power of $860 billion in 2008. This number, which has been growing robustly for years is expected to rise to $1.4 trillion by 2020, as population and economic dynamics make it possible for more Africans to increase their consumption of basic and discretionary goods and services.

As some background, you can see from the World Population Bureau’s 2010 datasheet here that there were over 1 billion people living in Africa as of mid 2010. That alone means nearly one in every seven people in the world currently lives in Africa. Nigeria, for example, is the eighth largest country in the world, with 158 million residents (compared to 310 million in the US).

In terms of consumer spending power, economists like to break down income brackets which define consumers who satisfy their basic needs, and those with discretionary income. Generally, the $5,000 level in purchasing power is used to define the point where consumers are able to go from satisfying their basic needs to spending on discretionary goods. As you can see (sourced from McKinsey) in 2000 there were approximately 59 million households in Africa with discretionary income to spend. By 2008 that number had jumped to 85 million, and by 2020 it is forecast to rise to 128 million – more than double in merely two decades.

In addition to being a large consumer market presently, Africa also has an incredible amount of opportunity for growth. According to the World Population Bureau, Africa’s rate of natural increase in population is estimated to be 2.4% - meaning that by mid 2025 there will be an estimated 1.4 billion people living on the continent, and 2.1 billion by mid 2050. The chart below (also from the World Population Bureau) shows the ten countries with the highest population under 15 globally as of 2010: all but one are in Africa.

In fact, according to McKinsey, Africa’s workforce will be the largest in the world by 2040 – surpassing even India and China.

Even more surprising is the opportunity for penetration of new markets. Since the year 2000, McKinsey notes that 316 million new phone subscribers have signed up in Africa. However, they also note that in 2008 only 39% of Africa’s population had access to telecom services , 38% had access to modern retail, and 20% had access to banking (note that these statistics include South Africa, where the numbers are 92%, 68%, and 60% respectively, skewing the average up). It is amazing to think of the potential for growth in companies that are able to fill those gaps.

Thus, population growth and an emerging middle class mean that Africa is a compelling opportunity for consumer goods companies, especially given limited growth prospects in much of the developed world. Many companies have already realized this, and are beginning to capitalize on the trend. As we wrote earlier, the South African retail chain Massmart was recently purchased by Wal Mart, who hopes to use the brand to grow into the continent (read here). Many other companies are making similar strategic pushes.

What does that mean to us, who invest in African markets? Of course we at Nile understand the opportunity for growth in companies that effectively produce goods that suit African consumers’ needs. We see enormous opportunities in retail, food, housing, cellular phones, and financial firms that are well positioned to access the growing consumer market. We also believe that African companies are often uniquely positioned in the market, as they are able to bring local knowledge and branding power to their business model. We actively seek precisely these sorts of firms – ones which pair local knowledge with strong growth prospects and good valuations. In fact, consumer firms are one of our three main ‘themes’ (infrastructure and natural resources are the others) for investing in African markets.

To answer our earlier question – the consumer market is large, growing, maturing, and - in many cases – relatively untapped. Not a bad place for long-term investors to be.

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.

The ‘Infrastructure Tinted Lens’

Early in the first day of Institutional Investor’s Africa Conference Jay Ireland, the President and CEO of GE Africa (a recently created position), noted that he views opportunity in Africa through “infrastructure tinted glasses.” As Jay sees it, the opportunities for investment in Africa are largely driven by the Continent’s infrastructure needs. We had previously written about this issue as addressed by the World Bank’s Dr. Shanta Devarajan (read here), who noted that Africa would require an additional annual investment of $48 billion per year to bring Africa’s infrastructure to the level of Mauritius. We concur that investment in firms which operate in the African infrastructure space present a number of compelling opportunities. Infrastructure in Africa can be perceived as both a challenge and an opportunity. As one of the conference’s other panelists noted, road density in Africa is about1/8th what it is in the BRIC economies (McKinsey’s Global Institute claims it is about 1/5th, but regardless, Africa is a clear laggard). McKinsey also notes that power generation in the BRICs is 2.4x that of Africa, and rail density is 2.3x higher. In addition, these numbers also don’t take into account the relative difference between South Africa and the remainder of the continent, for which the gap is significantly wider. Phone and cellular networks – although in many cases improving – remain spotty, and many Africans carry multiple phones in hopes of maintaining service from one place to another. In addition, urbanization and population growth is putting a strain on many of Africa’s urban centers, where affordable and effective access to housing, water and sanitation, energy, and transportation remains a challenge. Also, the ability for countries to capitalize on natural resources and manufacturing is hampered by poor infrastructure networks. Even if an investor is looking at Africa from a traditional resource-based perspective, the cost of bringing goods to market – and therefore profitability – is directly linked to infrastructure networks that in many cases have not been adequately supported. Also, as African countries attempt to move into more manufacturing and intermediate or finished goods, access to the resources necessary to operate machinery will be a critical factor. Presumably it is clear that investment in infrastructure is sorely needed on the African continent. However, in stark contrast with previous decades, a significant (and rapidly increasing) amount of capital is being put towards solving Africa’s infrastructure challenges. Perhaps it is not surprising to learn that, according to McKinsey, growth in transport and telecommunications grew by an annualized rate of 7.8% from 2002 until 2007, and construction grew at 7.5% annualized over the same period. For example, according to McKinsey, from 1991-2005 only about 1% of resource deals in Africa had an infrastructure component included. In contrast, that number had climbed to an average of 23% for the period between 2006 and 2010. In fact, McKinsey also predicts that between 2008 and 2020, revenue for infrastructure companies will grow by an annualized 9% rate, reaching over $200 billion by 2020, from approximately $72 billion today. So what does that mean to us, who invest exclusively in opportunities in Africa? We have been adamant that infrastructure was a huge play for investors. We see great opportunities in many of the sectors mentioned above, as well as the companies which provide them with financing. In fact, we consider infrastructure companies to be one of the three key themes of our strategy, and actively position ourselves to seek companies that we believe will benefit from this trend. We absolutely understand why GE would see Africa through infrastructure tinted glasses – we do the same. 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.

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