Daniel Broby

A question that comes up all the time when speak to investors is how GDP growth translates into market performance, especially if you consider that for past decade, the frontier markets have been growing at above average rates.

We have seen it before in other emerging markets. The companies that were closest to these markets are also the ones that benefitted from this growth. As investors you want to make sure that your always hit the sweet spot of where the growth is.

In this podcast, I speak with Daniel Broby, Silk Invest’s CIO for Public Markets about what actually drives frontier market GDP and how investors can capture the upside of this economic expansion

Listen to the podcast

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Hans Rosling

And I can’t think of a better way to do this by sharing one of his remarkable presentations with you. Hans likes to use dynamic graphs to share his insights, they really make economics come alive.

In this short clip, Hans shows us how the world is rapidly converging with it comes to the structure of society. This is certainly worth 2 minutes of your time to watch!

Hans Rosling is on a mission that he describes as “Fighting devastating ignorance with fact-based worldviews everyone can understand.”

More about Hans Rosling

As in everything we do, we always the local local perspective so in this digest, there is a special emphasis on articles from frontier market based publications.

Highlight: UAE AND QATAR UPGRADE TO EMERGING MARKET STATUS AND MOROCCO MOVE TO THE FRONTIER MARKET INDEX

Where to Invest Now: The Most Promising African Stock Markets

African stock markets have put together an incredible run of late. This has prompted several readers to ask which one looks like the biggest bargain now.

US corporate investors lured to booming Pakistan equity market

The booming stocks market of Pakistan is expected to get a favorable and enthusiastic response from American institutional investors as the Karachi Stocks Exchnage (KSE) orgainsed a well-attended investment conference in New York on June 10.

Emerging economies: Euromonitor spies investment opportunities in African markets

Market research firm Euromonitor International has pinpointed five ‘frontier’ economies in Africa that it says could hold investment potential on the back of increasing wealth – as growth outpaces that of many stagnant economies elsewhere.

Coca-Cola Enters ‘Frontier Market’ Myanmar

As Coca-Cola unveiled its first processing plant in Myanmar after a six-decade hiatus in the country, one analyst warned that the move into frontier markets could mean emerging markets are not as attractive to multi-nationals as they once were.

China Plans To Revive ‘Southern Silk Road’

In an attempt to strengthen trade ties with South and South-east Asian neighbours, China has decided to revive the ancient “Southern Silk Road”. The Silk Route, originating from the Chinese city of Chengdu, wandered through Myanmar and then extended to Bangladesh, India and even the Middle East.

Kazakhs launch “Silk Road” China-Europe rail route

Kazakhstan has launched a new transit railway linking China to Europe, aiming to beat rival routes for journey time in the competition to handle a growing flow of goods along the ancient Silk Road trade route.

Youssef Lahlou of Silk Invest

And while these markets are far more advanced than many of their frontier market peers when it comes to infrastructure and the breadth of listed companies, there still is a company ownership limit for foreign investors. This is especially true for Qatar where the limit currently lies at 25%.

Listen to a chat with Youssef Lahlou, our equity analyst that covers Qatari equities. He shares his perspective on the dilemma MSCI is facing with this decision.

Youssef also speaks about some of the upcoming Qatari IPOs, which are rather sizeable for frontier market standards.

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Take a few minutes to watch the narrated presentation below in which we explain how investors can benefit from the rise of the frontier market middle class in a bit more detail

Have a look at our frontier market funds

As the date nears for an MSCI Index review, the Moroccan market is again buzzing with talk about a potential re-classification to Frontier Market status.

I spoke with Youssef Lahlou, Silk Invest’s Casablanca-based equities analyst about the  possible implications and the view from the ground.

Have a look at our frontier market funds

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Stephen Charangwa

Stephen Charangwa, Silk Invest’s fixed income portfolio manager, provides us with an update on the Kenyan bond market and tells us why rising demand for African bonds could become a great alternative to a weakening trend in donor funding.

Listen to the short podcast below

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‘How do you hedge the risk of frontier market currencies?”

It is only natural that this topic always comes up because to most investors the frontier market countries are unknown territory. The fact that they have their own currency makes them even more exotic.

We thought you may find it useful if we shared a bit of perspective on the frontier market currencies.

First of all, we don’t believe it makes much sense to hedge frontier currencies. There are a few reasons for this:

The cost of hedging would eat up much of the upside potential. These markets aren’t as efficient nor are they quite as liquid as the more developed markets, this makes hedging expensive. In some cases, there simply isn’t enough of an infrastructure in place to do so.

We also believe there is a better way to deal with frontier market currency risk: Diversification.

Have a look at the chart below, this is a simulation over 10 years. What it shows is that, even by equally weighing the exchange rates of 6 frontier market currencies against the US$. The overall impact is only slightly negative. However, add an average yield to maturity of 10% to the basket and the individual currency risk will be overly compensated for. This is not unrealistic because these are the kinds of yields that can be found in today’s local currency frontier markets.

Source: Various sources; Silk Invest. 6 currencies have been used for the backtest

Each currency is driven by its own fundamentals and has its own supply/demand cycles. Predicting the trajectory of currencies is not easy but we do believe that it makes sense to apply a Purchasing Power Parity (PPP)* method to determine medium and long term value of a monetary unit. Even though making currency calls is not really a part of our investment methodology, this relative valuation does help us when it comes to making asset allocation decisions.

Source: World Bank; Silk Invest

Each currency is a world of its own. Listen to the short podcast below with Tammy Tang, who is attending the Investment Management Program at the London Business School. She has been doing some work with us by taking a closer look at what drives frontier market currencies. In this episode we cover some of the fundamental factors that affect the Kenyan Shilling, The Moroccan Dirham and the Nigerian Naira.

*More about PPP

An Arrtist’s impression of the business district of Konza City, a planned technology district in Nairobi

Kenya has a strong reputation for being ahead of the curve when it comes to applying technological innovation to business.

It is not for nothing that’s many refer to this east African nation as the ‘Silicon Savanna’. Kenya is rising very fast as the technological powerhouse of Africa!

There seems to be a different, more creative attitude towards dealing with problems amongst the Kenyans. Maybe it is something in the water, but there is a new generation of entrepreneurs who come up with the most amazing ideas as solutions.

This ‘can do’ environment is rapidly transforming Kenya’s society. Technology has not only made financial services widely available across all levels of society via mobile phones, it has also facilitated a more efficient access to capital for the entrepreneurs that make up most of the Kenyan economy. Today there is a space where small businesses can truly create products and services that have a positively disruptive impact.

There are many examples of how this creativity is being put to work, ranging from how it allows education to find its way to more people online to those who are trying to turn the unused parts of television frequency with into high-speed Internet access around the country.

Adele Gikonyo and Baldwin Berges of Silk Invest, along with some investors, meet with the members of the management team at Equity Bank

Adding to all this innovation, Equity Bank further builds on its reputation of a game changer by partnering with Google to release BebaPay for the public transport system.

Just as it did with telephone banking, the objective is to reduce the use of cash by paying for public transport with a pre-paid card that can even be charged with a mobile phone.

This would allow not only to lower the cost of transport through efficiency, but it will provide thousands of small entrepreneurs in the transportation sector with more visibility on how their vehicles are performing while making tax collection by the government more efficient. Furthermore, BebaPay will have a positive effect on commuting passengers because it will keep public transportation more affordable and better funded.

Adele Gikonyo, Sub-Saharah Equity Analyst at Silk Invest

The system will work by using a commuter card that can be charged by a mobile phone. What especially caught our attention is that Google chose Kenya as Africa’s launchpad for the payment solution. This may well have to do with the fact that mobile banking is already so widespread that the adoption of this new system will prove to be seamless.

It will not only allow a Equity bank to diversify its revenue stream, but it will also further position the institution as a true solution provider in addition to being a bank.

It is refreshing to see that a bank can have a such a clearly recognisable and positive impact on its society for a change!

Listen to a short conversation with Adele Gikonyo, our equity analyst based in Nairobi. She provides some more perspective on BebaPay.

Stephen Charangwa and Daniel Broby

These are fairly unknown markets, explored only by few investors. If you can get over the lower levels of liquidity, the exotic nature of local currency and the (often misguided) perception of risk, there are handsome rewards for the intrepid asset allocator.

Listen to a short podcast with Daniel Broby, Silk Invest’s CIO and Stephen Charangwa, Frontier Fixed Income Portfolio Manager. They offer their perspective on these nascent and promising markets.

Hard currency denominated frontier fixed income offers a risk premium over emerging market debt. The risk premium is well over 600 basis points over US Treasuries

Frontier Markets currency offer attractive yield levels. A diversified allocation helps mitigate individual risk attributes for each currency

CLICK HERE for more information about Silk Invest’s Frontier Fixed Income Fund (for professional investors only)

We’ll be in great company as we are going to be touring along with AK Asset Management, one of Turkeys leading asset managers. They will give us insights into investing in Turkish mid- and small caps as well as the growing segment of corporate bonds.

OFI Asset Management, a major French investment manager, will also join us in Paris, Luxembourg, Geneva and Zurich. OFI will speak about their strategy of combining BRICs with Africa and the Middle East.

Silk Invest will cover the frontier markets in more detail, speaking about the grand rising consumer opportunity and how to put it to work for your investments.

Listen to the audio trailer, it provides a preview of what we will be talking about:

The schedule

Make sure to book your place as there are only 20 places per venue!

March 27 – Helsinki – register here

March 28 – Amsterdam - register here

April 8 – Milan - register here

April 9 – Paris – register here

April 10 – Luxembourg - register here

April 11 – London – register here for the 11.30am session   (3pm session is complete)

May 6 – Frankfurt - register here

May 7 – Munich - register here

Topics covered

• How Morocco’s leading companies expand out to Africa.
• The deepening relationship with the Middle East
• How Morocco’s unique large-scale real estate development model is moving into foreign markets.

Listen to the interview on the player below

In this piece we take a closer at why this sector should be the focus of investors who seek to capture the opportunity of a rising global middle class.

http://www.youtube.com/watch?v=XCImZePS4Us

When Warren Buffet explained his thinking behind his recent investment in Heinz, a global food heavyweight, it is based on the view that regardless of where the economy goes, food always tops the shopping list.

This is especially true for developing markets. In contrast to developed economies where we find a taller stack of needs, the behavior of consumers in developing economies lies closer to the base of the Maslow Pyramid. As can be seen on the chart below, households in developing economies spend a larger portion of disposable income on food than in more industrialized economies.

Percentage of Household Income spent on food products – click on the image to enlarge

That is why we believe that investors should focus on finding and investing in businesses that can benefit from the essential demand that makes up for most of the consumer’s share of wallet.

One of our colleagues in Silk Invest’s private equity team, that focuses on African consumer-facing food businesses, recently reminded us that the key to success is the ability to create capacity and then know how to manage it well.

Africans dedicate more share of wallet to food that other regions. Click on the image to enlarge.

Food is so basic that when it gets hard to come by, it can trigger revolutions. Let us not forget that the spark that lit the Arab Spring revolution a couple of years ago was all about an imbalance in the food supply in Tunisia. As long as civilization has been around, food security was always the number one priority. This is nothing new. And therefore It is not a big surprise that the food sector that is one of the most represented sectors on local stock market exchanges.

More investors seem to be realizing that food is the place to be. Just look at the graph below to see how frontier market foods companies performed over the past year…

Here is a selection of some of the major food companies in the frontier markets. Click on the image to enlarge

Investments in the food industry are a key component of Silk Invest’s Investment Strategy. We even have a private equity soley dedicated to the consumer-facing food sector in Africa.

For more information about our activities and our funds, please go to our products page

Hesham Saad. Silk Invest’s Cairo-based Investment Director

In this 10 minute interview with Hesham Saad, our Cairo-based investment Director.

He tells us about his impressions from his recent investor trip to Vietnam.

We speak about Vietnam’s surprising urban discipline in keeping cities clean.

This is an interesting perspective on an economy with attractive valuations and about a country that seems to well be on top of things.

http://www.youtube.com/watch?v=xvYGypXu23g

Adele Gikonyo is Silk Invest’s Nairobi-based listed equity investment analayst

In this 5 minute audio interview, Adele Gikonyo, our Nairobi-based investment analyst shares her insights and perspectives with us about Kenya.

Adele tells us about the positive evolution in Kenya’s political process and what it may mean for the upcoming elections in March.

We also spoke about how after only half a decade, Kenya has Managed to evolve into Africa’s leading technology hot spot.

I hope you can take 5 minutes to listen to the interview

http://www.youtube.com/watch?v=RZQr6pBcSt0