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The Case for Investment in New Emerging Markets - Africa & Middle East Strong 10Yrs Returns and Attractive Entry Point

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The Case for Investment in New Emerging Markets - Africa & Middle East Strong 10Yrs Returns and Attractive Entry Point The Case for Investment in New Emerging Markets - Africa & Middle East Strong 10yrs returns and attractive entry point 10 Year Annualized Euro Returns (%) Current value vs. 5 Year high (%) Emerging Markets 8% Emerging Markets -24% World -5% World -51% Dubai* 5% Dubai* -81% Nigeria 6% Saudi Arabia -74% Saudi Arabia 8% Nigeria -74% Ghana 6% Ghana -65% Abu Dhabi* 5% Abu Dhabi* -63% Kuwait 13% Kenya -57% Kenya 0% Qatar -55% Qatar 15% Kuwait -54% Egypt 10% Botswana -49% Oman 6% Oman -43% Botswana 10% Egypt -35% Morocco 4% South Africa -29% South Africa 7% Mauritius -27% Mauritius 9% Morocco -24% Tunisia 9% Tunisia 0% 2 -10% -5% 0% 5% 10% 15% 20% -100% -80% -60% -40% -20% 0% Source: Bloomberg; MSCI World; Silk Invest Note: Values of End November 2009; *Values for UAE are based on 2001 data Salt trading predated all other forms of trade 3 Early trading routes 4 Now the trading routes are re-establishing themselves o It is Silk Invest’s view that the barriers of trade are coming down and that new trading routes are being re- established. o Over time, these will redistribute purchasing power based more on population and resources. 5 The story is not just oil o OPEC producers have around two-thirds of the world’s oil reserves. o Majority of these oil reserves are located in Saudi Arabia, Iran, Iraq Nigeria and 6 Kuwait We are returning to a world where population correlates to GDP. 100% 5% 9% 8% 4% 9% 90% 2% 16% 9% 2% 8% 7% 80% 8% 12% 23% 21% 70% 10% 60% 27% 19% 50% 61% 40% 50% 57% 26% 30% 37% 20% 17% 10% 22% 14% 7% 6% 7% 0% 1000 A.D. 1820 A.D. 1950 A.D. 2009 A.D. 2050 A.D. Africa & ME Asia Western Europe United States Latin America Other 7 Source: The World Economy Historical Statistics, Maddison & Angus, ; World Bank; Silk Invest Why are some countries developed, and others less so? o Attitudes are that societies somehow different, for instance with regard to underlying attitudes, preferences or culture. o This generates a set of attitudes towards economic policy. By stressing the role of factors such as savings, population growth or levels of corruption o But these are symptoms rather than causes 8 Regional drivers o Sub-Saharan FDI: $36 billion of FDI in 2006 twice the level of 2004 Africa o Best performers: Seven out of the top 20 fastest growing economies o Democracy: Number of non-democratic states has fallen to 11 from 37 o M&A: Increasing M&A flows led by both local and international o Competitiveness: 2 African countries outrank India according to WEF o Tourism: Continuous growth of tourism revenues North Africa o Outsourcing: Cost pressures in Europe lead to offshore diversification o FDI: Foreign investments amount to more than USD 24 billion annually o Remittances: Remittances have doubled since 2002 o Infrastructure: Sizeable investments should unlock long-term potential o Non-oil: 10% annual growth of non-oil industries Middle East o Location: Region as economic hub linking Asia to Europe o Capital: Big reserves help to sustain investments during economic storms o Education: Increasing investments in education to improve productivity o Infrastructure: $400 billion in infrastructure in the coming 3 years 9 Will there be convergence? o Robert Solow (1956) - The dominant paradigm for several decades. o By the law of diminishing returns to inputs, poor capital- scarce countries should exhibit higher rates of return to capital. o Consequently, per capita incomes in poor countries should grow faster, and eventually living standards in all countries must converge. 10 The Arab Common Market o The Arab Common Market was first proposed in August 1964 on the basis of a resolution passed by the Council of Arab Economic Unity. o The long-term goal of the ACM was to establish a full customs union that would abolish—amongst its members—trade restrictions, trade quotas, and restrictions on residence, employment, labor, and transportation. o In 2008, the Council of Arab Economic Unity has finalised a blueprint to set up a customs union that will lead to the establishment of the Arab common market by the end of 2019. 11 Arab Maghreb Union o Created in 1989 under the Marrakech Treaty. o Objective is to create a common market. o In 1991 adopted an agreement on trade and tariffs. Under the protocol on rules of origin, 17.5 % is to levied on goods manufactured with imported inputs. o Hope to pursue Euro-Mediterranean FTA through the Mediterranean Development o Assistance Program provided by the EU. 12 Community of Sahel-Saharan States o Created in 1998 o Objective is to form a common market o Pursuing programs that seeks to reverse desertification o Established African Development and Commerce Bank in 1999 as a source of financing projects that contribute to strengthening integration of the Community of Sahel-Saharan States 13 East African Community o Objective under the Arusha Treaty includes: broad based cooperation; gradual creation of a Customs Union, a common market a monetary union and political federation; etc. o It is a Customs Union and close to forming a Common Market o Harmonized custom rules to facilitate trade within the region o Harmonized financial rules governing security markets. o Created the supra-national East African Securities Regulatory Agency (EASRA) to regulate Banks and the stock markets in the three member countries o Has a framework for the coordination of monetary and fiscal policies, including macroeconomic convergence. 14 The Common Market for Eastern and Southern Africa o Created as a PTA in 1981 and was reconstituted in 1994. o FTA launched in 2000 and working towards a Customs Union in 2008. o Reduced non-tariff barriers: (1) introduced a harmonized single customs form in 1986; (2) third party insurance o Follow a monetary program with member countries expected to follow convergence criteria. 15 Southern African Development Community o Created in 1994, out of Southern African Development Cooperation Conference (SADCC) o Working on the creation of FTA 2008, Customs Union (2010) and Monetary Union in the foreseeable future o Harmonized a number of its customs and transport policies so as to speed the facilitation of trade in the region o In 1995 the Southern African Power Pool (SAPP), a consortium of twelve national electricity companies, was created to provide economical and reliable supply of electricity to member states 16 Remittances and FDI are fueling growth 17 Source: World Bank ; IMF; Silk Invest As is the communication revolution Communications systems impact: Organisation of business life. Organisation of household and community life. Productivity of firms and workers. Communications systems lower transaction costs, widen buyer and supplier networks. Two-way networks (telecoms) more important than one-way networks (broadcasting). 18 Wireless is being rolled out across the continent o Wireless has skipped a generation. o ARPU’s of USD 40 per annum. o Africa is the fastest growing region in the world for mobile phones o Sub Saharan Africa grew 67% last year compared with 10% in W. Europe o Last year there were more new mobile phone customers in Africa than in North America 19 Growth trajectory is steady 20 Source: World Bank December 2008; Silk Invest Double digit population growth every 5 years Positive catalyst for growth in all sectors related to growing population needs and especially middle class Page 21 21 Source: World Bank And low debt levels. Middle East and Africa are only regions with more reserves than Debt giving them more flexibility to deal with current challenges Page 22 22 Source: IMF Note: Debt is total of public and private debt; Reserves are IFS Reserves ex. Gold Developing the yield curve o Financial Stability reducing foreign currency exposure and improving financial intermediation o Avoiding concentration of intermediation uniquely to banks o Allow the Efficient Allocation of Resources: Market interest rates reflect opportunity cost of funds at given maturity o Increase price competition iand permit market pricing instead of relying on banks only o Benefit Corporate Funding: Create possibility of matched currencies o Stimulate domestic Savings o Liquid and deep government bond market will over time reduce debt service cost 23 Educational standards are improving o Education is a lagging indicator o Previously it was often viewed as an expensive and inefficient public service that largely benefited the wealthy and privileged. o Now it is understood to make a necessary contribution to boost productivity, competitiveness and economic growth. 24 Saudi Arabia Background o With USD 40 billion revenues, SABIC is the world’s leading manufacturers of chemicals, fertilizers, plastics and metals. o SABIC has comparative advantages regarding due its cost structure and being in the middle between its main markets China and Europe. Valuation o PE ’09e = 22.1x o PE ‘10e = 11.6x o Target return = 22 % 25 United Arab Emirates Background o The MENA’s leading low cost carrier serving 60 destinations and which will carry more than 4 million passengers in 2009. o One of the world’s most efficient low cost carrier with the industry’s highest load factor (86%). Valuation o PE ’09e = 10.9x o PE ‘10e = 9.8x o Target return = 33 % 26 Qatar Background o Qatar Navigation is a diversified shipping and transportation company. its key divisions are the Shipping Agency, Marine Transportation, and Commercial Activities. o Well positioned to profit from growth of Qatari economy and its gas sector. Valuation o PE ’09e = 9.7x o PE ‘10e = 9.0x o Target return = 25 % 27 Kuwait Background o One of the world’s most global mobile telecom players with significant markets shares in a number of African markets o ZAIN provides its services in six Middle Eastern and 14 sub-Saharan countries to over 29.7 million active individual and business customers.
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