High Conviction: Opportunities in Africa and the Mideast

 |  Includes: AFK, EGPT, GAF, GULF
by: Jamie Allsopp

Jamie Allsopp joined London-based Insparo Asset Management in November 2009, bringing nearly a decade of first-hand experience of African markets to his role, which combines investment research and allocation with marketing the firm’s Africa and Middle East fund in Insparo’s target regions.

Jamie was previously with New Star Asset Management for eight years. During his tenure, Jamie rose from equity analyst to portfolio manager for two of New Star´s high profile funds. In 2007, Jamie launched the New Star Heart of Africa Fund, which invested in Sub Saharan equities.

We recently had the opportunity to ask Jamie about his current asset allocation and the areas he's most bullish on within Africa and the Middle East.

In your portfolio currently, how are you allocating among different asset classes?

Insparo Asset Management is a multi strategy asset manager. We have the ability to access the equity and credit markets, both sovereign and local currency. This approach has been crucial to diversification in less liquid markets, capital preservation and gaining exposure to the most efficient capital structure in a strong market.

Africa and the Middle East have promising equity stories. We think, however, that local market credit is a complementary addition to an Africa and Middle East portfolio. It is a nascent and exciting development within the African financial universe and one that sets our portfolio apart.

Post the Asia and LATAM crisis, investors emphasized the benefit of local bond markets rather than $/E markets as a way to access local capital. Post debt forgiveness in Africa there is a need to fund locally. It took ten years for this message to be heard in LATAM but now the local market asset class is fast growing. Brazil issued its first inflation link bond a few years ago, Angola issued an inflation linked bond recently, the only country in Sub Saharan Africa outside South Africa to do so. The dedicated local market investor base will drive local markets in Africa and there is the benefit of the financial technology having been pioneered elsewhere.

The credit markets have seen rapid developments; a major feature of this has been duration extension. Government yield curves now extend to 10 years in many countries and in Kenya and Zambia to 15 years. In Nigeria there is a 20 year local currency bond and in Zambia it is possible to obtain a 20 year mortgage whereas 5 years ago the maximum duration was five years. A number of countries are putting in place the legal framework for issuing mortgage backed securities, however with loan to value ratios of 40% don’t expect African sub prime anytime soon. There are also plans for a Diaspora bond which will involve the securitisation of future remittance flows, tapping into the wealth and investor savvy of overseas earners.

We are set up to hedge out risk when we see volatility increasing and to use leverage if we see a period of stabilisation. We use hedges such as indices, swaps and other derivatives. Where possible we have the ability to hedge our currency exposure too. It is also possible to be short of some of the sovereign issuance such as Ghana and Gabon although we are positive on the region.

The portfolio is marginally overweight the credit market, however we are allocating more to the equity market as we see value and increasing stability.

Which single asset class do you think will perform best through 2010?

Within the equity asset class we are positive on the Nigerian stock market. It remains c.60% lower than the highs in 2008 even after its 10% rally year to date. The sector within the index which we think will be the star performer is the banking sector. The banks are trading at a 66% discount on a price earnings ratio and a 45% discount to price to book ratio relative to banks in other emerging markets. There has been a supportive macro scene in place for some time. The governor of the Central Bank of Nigeria recently announced Nigerian GDP growth to be at 6.9%. The constraining factor with regards to the performance of the banks has been the uncertainty of the margin related assets that the banks had held on their balance sheets. This has however been guaranteed by a soon-to-be state created asset management company that will hold these toxic assets. In order to further restore faith in the Nigerian banking system, the Central Bank of Nigeria has guaranteed all foreign and interbank credit, while also allowing foreign banks to acquire Nigerian banks. For the first time, and in accordance with international accounting standards, the Nigerian banks will report at the same time in Q1 2010. This harmonious release will further quell the fears of international and domestic investors over the viability of these institutions.

The decent economic performance continues to throw interesting investment opportunities as Africa’s middle classes continue to expand. Another sector that we see offering good growth is that of telecommunications as mobile usage continues to rise from a low base. To quote the Chairman of MTN, “Whether you are in Sweden or you are Swaziland or Rwanda, the mobile phone has become almost an essential service.” In addition, the sector is throwing up new business models in mobile banking, providing huge opportunities for revenue growth. M-pesa in Kenya now has 7 million users (September 2009) and in September 2009 person to person transfer were USD302 million.

Within the Middle East, Qatar’s growth is creating very attractive opportunities. The country has high credit quality and a strong banking system. After enjoying average real GDP growth of 13% over the past five years, expectations are that Qatar's economy will markedly distinguish itself from neighboring countries by recording economic growth of 12.0% in 2010. The growth reflects the country's wealth in natural resources accentuated by rising global demand for Liquefied Natural Gas (LNG), of which Qatar is the world's largest producer-exporter. Over the next five years Qatar will benefit from US$260bn of infrastructure spend, predominantly in the oil and gas sectors. Furthermore, and attesting for Qatar's domestic wealth, the country displays one of the highest current account balance / GDP ratios in the GCC. While the regional financial industry was suffering from lack of liquidity and increase in credit and market risks, the Qatari banking industry benefited from the government's direct and indirect precautionary measures designed to ensure its stability. Strong regulatory framework, highly supportive government and relatively low current banking penetration rates (FY 09 loans and deposits at a respective 80% and 73% of 2009E GDP) are strong positives to ensure the industry's sustainable and healthy growth moving forward.

How has Africa fared during the crisis?

Growth in Africa has rebounded strongly after the slowdown in 2009 - we are seeing 7% real GDP growth in West Africa. Combined with the resurgent strength in growth, inflation across the region is declining. Ghana has experienced seven consecutive months of year on year declines in inflation. African policy makers have had the room to run accommodating monetary and fiscal policy during 2008 and 2009 without dramatically changing their debt ratios. The monetary easing is likely to continue in many countries across SSA as the accommodative policies are likely to run into a period of elections. Nigeria and Tanzania have elections this year and the Democratic Republic of Congo, Uganda and Zambia have elections in 2012. The broad range of policies put into place by African governments over the recent years to cushion the negative impact of the slowdown would lend itself well to the OECD lecture circuit, they seem to have done a better job than the European economies. Many countries have drawn on their reserves, South Africa has set aside $100bn for public investment between 2010 and 2012; Kenya has issued its first infrastructure bond; Uganda, Kenya and Tanzania have raised infrastructure spend by between 20% to 30% in their 2009/2010 budgets to enhance economic growth; Tunisia has increased public investments by 20% in 2009 and Morocco is expected to act in a similar manner in 2010. Overall the continent has moved from a current account surplus of 3.4% of GDP in 2008 to a deficit of 4.2% in 2009. This is a commendable position bearing in mind the fiscal situation within the OECD countries and the historical context.

African governments are interfering less with companies, dispelling the idea of malevolent dictators confiscating assets and plundering the continent’s wealth. Privatisation is occurring and the size of government is relatively small. Africa is cognisant of the terrible consequences of bad government and reform is underway. Encouraging private sector development to spur investment should provide a base for diversified growth in the coming years. Private sector development requires adequate access to capital. Africa knows this, hence the opening up of local money markets (which has transformed other emerging economies) the deepening of equity markets and much venture capital activity.

Have any instruments emerged in the past few years that you’ve adopted in your portfolio construction?

We have found the emergence of P-notes in Saudi Arabia, forward FX agreements in Africa and the newest market, that of the local IRS market in East Africa, to be of use in portfolio construction.

How can an individual U.S. investor access some of the investment ideas you describe?

It is difficult for an individual investor to gain a level of detailed company knowledge within frontier markets, as on the ground research is expensive yet essential. We at Insparo make considerable efforts with propriety research and thus travel to the region consistently throughout the year.

Also, major financial institutions will not, on the whole, enable individuals access to the investment ideas highlighted above as their presence in the region is limited too. We recommend a diversified approach through the equity and the credit of the Africa and Middle East region in order to achieve an attractive risk adjusted return. The Insparo Africa and Middle East fund strives hard to offer investors access to this exciting investment opportunity.

Thank you, Jamie.

Happy to participate.

Read more High Conviction Picks »

If you are a fund manager and interested in doing an interview with us on your highest conviction stock holding, please email Rebecca Barnett.