A new round of emerging market investment opportunities
Egypt, Kenya and Nigeria are making significant reforms, and some emerging market fund managers are upping their exposure, writes David Brenchley.
The Middle East has undergone reforms in order to make itself more attractive to foreign investment in recent years. The United Arab Emirates is one key example of this trend, with Dubai becoming much more prominent in the global financial sector.
Now, African countries are beginning to take on the mantle, becoming reformist nations in their own right. As a result, the continent is becoming increasingly attractive to various global fund managers, including UK-based manager Ashmore. It has tripled the African weighting in its Emerging Market Frontier Equity to 30 per cent over the last two years.
Three countries in particular have caught the eye of the group: Egypt, Kenya and Nigeria.
The former is further ahead along its road to reform than the other two, having come through some particularly tough times; the Arab Spring in 2011 and the Muslim Brotherhood coming to power the following year.
However, the current Egyptian President, Abdel Fatteh el-Sisi, has been making some tough short-term decisions that Brudenell hopes will bring considerable long-term benefits. The country has substantially devalued its currency, reduced subsidies and tried to protect the more vulnerable in society.
As a result, consumer sentiment is picking up, inflation is coming down and the economy is improving.
Improving governance
Kenya, meanwhile, is taking big steps towards improving the governance of the country. For example, it recently re-ran an election that was contested by the main opposition party – hugely significant in a part of the world where many perceive elections to be rigged.
Other slightly unorthodox and inefficient policies that plagued the country previously have been reversed, such as capping interest rates on bank lending. It is also benefitting from some welcome respite from climate-related issues such as droughts.
Nigeria is "a year or so behind Egypt" at the moment, according to Ashmore portfolio manager, Andrew Brudenell. When oil prices and, subsequently, their own oil production capabilities collapsed, it failed to take action and adjust its currency.
That was a mistake that it has now remedied. "There’s much more confidence now in foreigners believing that the exchange rate is real, that you can put money in with a more sensible rate and take it out again if you want," explains Brudenell.
"That’s crucial, especially as the country imports everything and FX needs to move and to function properly."
While the upcoming election is currently causing uncertainty, that’s not because an unpopular candidate has a chance of triumphing; rather just that no one knows who will win.
Shareholder-friendly investing
On the equity investment front, Brudenell says all three countries have stock markets that are diverse and liquid with management teams that are competent, shareholder friendly and that have been through tough cycles.
One area Brudenell likes in these countries is the cement sectors, particularly in Nigeria. "We look for exposure to physical infrastructure and cement is involved in building a lot of that – whether it’s roads, bridges, ports, power stations," he explained.
He shared an investment adage that suggests if you like a country’s economy then you should like its banks, which he does.
Brudenell also likes consumer plays, where he says investors can find particularly well-run companies. These have had a tough time recently, with adverse currency moves raising the prices of importing raw materials.
But they, too, have made changes in how they source those materials, "becoming more domestically sustainable and self-sufficient" he says. "That will be reflected in margins, just as volumes and demand returns as well."
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David Brenchley is a reporter for Morningstar UK.
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