We have just issued our mid-month Frontier Market Outlook issue.

As always, we aim to provide you with our ‘on the ground’ insights and perspectives on these new investment destinations.

We have made a few further enhancements to the publication and we hope it will help you become more familiar with these rapidly developing frontier markets.

We look forward to keeping you updated.

John Bates, Investment Director Fixed Income at Silk Invest

Senegal’s election campaign started on February 5 with the actual vote scheduled for February 26.

Last month the constitutional court ruled that President Abdoulaye Wade had the right to run for a third term. This prompted street protests, partly because the constitution was revised by Wade himself in 2001 to impose a two-term maximum. Wade is now accused of the same repression and corruption as the regime he replaced in this nation of more than 12mn population. There are 5.1mn voters registered.

The 8.65% yield on Senegal’s $500mn 8.75% Eurobonds, due 2021 has been relatively stable. We expect this, partly because the bonds are tightly held by investors due to their rarity value. Also, the protests have been fragmented and the state’s ability to make its coupon payments has not been compromised.

Wade’s likely re-election will clearly be seen by many as corrupt. Nevertheless, our pragmatic view is that the continuity of subsidies and the honouring of important contracts in the ailing power sector may well be preferable to a marginal newcomer to power. An opposition victory would increase risks of corruption investigations and contract cancellations targeting major infrastructure contracts, such as Dubai Ports World’s contract for Dakar Port, pursued by the president himself. The opposition would also likely revise recently signed contracts, including African Petroleum’s two oil-exploration licences.

If there is one thing that really shines through from the month of January, it certainly is Egypt’s spectacular market comeback with the EGX shooting up by an impressive 28.3% over the period. It now seems that the change is moving in the right direction and this is bringing investors back to the region. Needless to say we are delighted with our allocation to Egypt as a core market going into the rally.

Furthermore, we saw great performance out of various corners of our exotic investment unverse such such as Vietnam, Kazakhstan, UAE, Saudi Arabia, South Africa and Turkey. Apart from bouyant equity markets, there also seems to be a strong appetite for emerging market debt, both at the soverign and corporate levels. January totalled an all time record level of issuance of just under US$ 30 billion. Nor surprisingly, many of the cash rich frontier markets are benefitting form this in a big way.

From our perspective, we have seen more interest by institutional investors for the frontier markets. This falls very much in line with what investors told us in our survey back in December. If we can judge from the manager search activity, it would be fair to expect the frontier markets to welcome a bunch of new first time investors over the next months.

It is about time to see the inflows because frontier markets have been lagging the major emerging markets for several years now. As can be seen on the chart, it becomes very clear that these new markets are trading at a generous discount as they have seen their premium fully reversed to the current attractive levels.

Apart from attractive relative valuations, the allocation of frontier markets in investor portfolios remains very low. Now that investors are gradually getting more familiar with these markets and as perception improves, we expect to see higher allocations that would bring investor participation in frontier markets more in line with their share in the global economy.

Hesham and Mohamed – our colleagues in Cairo – are in a very good mood these days!

This comes as no surprise because the Egypt Stock Exchange has been soaring upwards like a rocket ship, session after session.

The Egypt Stock Exchange in Cairo

The exchange has circuit breakers that get triggered when the market moves by more than 5% in a trading session. The breakers were tested again, only this time it was on the upside. So far this month, the Egypt exchange has already risen by an impressive 21%.

It is not only the stock market that makes our colleagues happy. It has everything to do with the fact that the transition is moving in the right direction.

Perception is now rapidly changing for the better. The military caretakers transferred powers to the parliament on January 23; this is a turning point after months of uncertainty about how true to their word the military would turn out to be.

Add to that the peaceful celebration of the revolution’s first anniversary, and there is reason for more people to believe that Egypt is getting back on track towards a bright future.

The United States have now also pledged financial support for Egypt’s transition. Washington has now clearly seen value and has decided it wants to back a winning horse. The IMF also gets a chance of doing the kind of work it was originally set up to do by providing a loan facility to ensure a smooth transition.

Many viewed the Egyptian revolution with much uncertainty. The world had eyes only for the ongoing street protests as the advent of a bigger and even more confusing revolution. Then again, when meaningful change takes place, it often happens in spectacular ways. We have seen this before in many other places.

You may know by now that at Silk Invest we don’t focus much on politics. Instead, we prefer to work with the facts and the underlying economic fundamentals.

What is a fact is that Egypt’s economy is made up of a set of impressive businesses that have proven to be tremendously resilient and focused despite the uncertainty. In the end, these are private companies that have a strong vested interest in the future of Egypt’s economy and will therefore work as the driving force behind a successful transition.

We should never forget that it was precisely because of these kind of dynamics that Turkey and Indonesia could become the success stories they are today. Why should it be any different for Egypt?

Download Silk Invest’s 2012 Annual Outlook here

First of all best wishes for the New Year and we hope that 2012 will bring you a lot of success and health. I would like to take this opportunity to share with you, our investment outlook for the coming 12 months. Our central investment theme for this year is that the political upheaval that marked 2011 will eventually fade away and that investors will return to fundamentals and increase their allocations to frontier markets… “The Sun Also Rises”

Investors are starting 2012 with a realistic assessment of the challenges that the world is facing. Frontier markets were not able to deliver in 2011 but their negative equity returns of around -25% were in line with the Euro and BRIC markets. Moreover, these numbers should be read within the historical events that took place in especially the Arab markets.

As a team we are proud to see our core regions moving towards more democracy and although change is never smooth, we are very confident of the final outcome. We are encouraged in our conviction by the relative speed of changes and the solid resilience of the corporate sector and real economy in even the most affected countries. Politics had a negative short term impact but did not derail the growth fundamentals. Political upheaval was not limited to the frontier markets in 2011 and rippled also through most of the developed world with Southern Europe experiencing the biggest changes. The new governments that took over on both sides of the Mediterranean all share a liberal economic agenda and their main focus will be on cleaning up.

Silk Invest expects that investors will eventually move their attention to fundamentals and will on the bond side favour governments with solid balance sheets and will on the equities side favour companies with solid earnings and yields. Within this environment, we believe that investors will move towards the frontiers which have the potential to become the world’s best performing regions in 2012. Frontier regions are uniquely positioned on the equities side with companies which are growing with double digit rates and which are selling at a deep discount versus the rest of the world. On the bond side, investors can buy into lowly leveraged economies with attractive opportunities in both hard currency and local currency bonds. Private equity bring these two sides together and is another attractive asset class in these regions.

Attached document further illustrates our views with the main following highlights:
1. Continued two-speed world
2. Frontier equity Markets are expected to recover lost ground
3. Potential double digit equity returns and similar picture on bond side
4. Painful de-leveraging in developed world has limited impact on frontiers
5. Year of political clean-up
6. A year with low inflation with biggest falls in rates within frontier regions
7. Continued low volatility profiting from low correlation
8. Flows to frontier regions are at historical lows

Finally, we want to thank you for your interest and your support. We will continue to provide you with further insights on our Silk frontier regions and we are looking forward to our future discussions.

Best regards,

Zin Bekkali

The Silk Invest team wishes you a Merry Christmas and a happy new year!

Looking back, we could say is that 2011 was either disastrous or remarkable.  At Silk Invest, we prefer to conclude it was the latter.

At times it may have felt a bit like an earthquake, but that is the least that can be expected when the tectonic plates of global economic power are shifting. Change of such magnitude is hardly ever an uneventful process.

If you think about it, some of investor’s worst fears have actually materialized in the space of only twelve months. Not too long ago, in the minds of many, the events that shook the world this year would have been expected to result in some sort of financial Armageddon. However, after all that happened, we are all still standing!

This is what made 2011 so remarkable; it is amazing how resilient markets can be. Somehow, we always find a way to carry on and that is very encouraging.

Investors have had some of their longstanding beliefs challenged; they will need to adjust the way they look at global markets. It is fair to say that at as of lately, more attention than ever has gone to the emerging and frontier markets; after all, they are the places where genuine growth can be found.

As you know, the frontier markets are what Silk Invest is all about and we very much look forward to continuing our dialogue with you in next year. Hopefully we can help you to better understand these fascinating places and help you to capture the enormous value they offer!

Thank you for your ongoing interest and for your support.

We hope you can find time to enjoy the holidays in the company of your beloved ones.

Warm regards from the Silk Invest team

Silk Invest recently conducted an investor survey. The objective of this effort was to assess investors’ views on frontier markets and to better quantify their investment strategy in these markets. The survey had a specific focus on the African markets.

The main conclusion from the survey is that frontier markets are increasingly part of investor’s asset allocation decisions and that investors have a very positive view on the investment opportunities in Africa.

Download the complete survey

Executive summary

Africa is more attractive than Asia

The most surprising and encouraging outcome of the survey was that investors view Africa as a more attractive investment destination than Asia. 43% of participants viewed Africa as the most attractive investment region within emerging markets. Asia came second at 37%. Investors ranked the attractiveness of Middle Eastern markets at the same level of Eastern Europe.

41% of investors have less than 2% allocation to frontier markets

Most of the respondents are active relationships of Silk Invest and have been following or investing in frontier markets for years. The survey shows that even within this investor base, allocations to frontier markets are relatively low with more than 40% investing less than 2% of their portfolios in frontier markets.

Silk Invest believes that frontier markets deserve a higher asset allocation weight as they represent over 10% of global GDP and over 25% of global Population. On a positive note around 30% of the respondents allocate over 10% of their portfolios to frontier markets.

70% of investors have less than 2% allocation to Africa

Investors view Africa as the most attractive investment region but close to half of them has no allocation to the continent today. Around 70% has less than 2% allocation to Africa.

Sentiment is however changing and it seems that investors will start to act on their conviction in the future. Only around 10% investors will keep their allocation at 0% in the future and most intend to move their allocation to above 2%.

Emerging middle class is the main attractive factor in Africa

Investors share Silk Invest’s conviction that consumer demand is the main economic driver for future growth in Africa. More than half of the respondents think that the population-related economic drivers are the main reasons to consider investing in Africa. Silk Invest estimates that around 750 million people in Africa live above the poverty line. Another 500 million potential consumers will be added in the coming 15 years, making the continent the most attractive consumer play in the world. Only 28% of investors view high commodity prices a reason to consider investments in Africa.

Conclusion – Frontier markets are in the radar screen

There is an increased awareness about the frontier markets amongst international investors but it does not yet full translate in allocations. The outlook is positive with respondents currently ranking Africa more attractively than Asia. This portfolio flows to frontier markets is still low but will eventually pick-up and drive these markets upwards. This trend is further heralded by the clear intention of investors to significantly increase their asset allocation to these markets. While political risk continues to be a concern, most participants in the survey assess well the positive drivers of growth which are linked to an increasingly wealthy population and improving business environment.

Silk Invest contributed to a report that focuses on the Innovative Approaches Along the Investment Value Chain in Sub-Saharan Africa

Click here to view the report

This report, “Private Equity In the Shadow of Giants: Innovative Approaches Along the Investment Value Chain in Sub-Saharan Africa,” surveys a wide range of stakeholders in the African private equity ecosystem to help new-to-Africa actors interested in understanding in more detail the investment opportunities and nuances in the operating models on the Sub-continent. It was compiled in the second half of 2011, triggered by the recent increase in positive hype that Africa received as the last frontier market.
The report covers trends and innovative approaches from fund strategies and fundraising, to deal-flow generation and post-deal value-add activities, and ultimately exits. Overall, it uncovered an attractive industry in flux, with increased competitiveness, but sufficient uncharted territory to grow from its still relatively small base.
Link

Silk Invest was featured in a BBC documentary about the great business opportunities in Ethiopia.

WATCH THE 7 MINUTE DOCUMENTARY ON THE BBC

A rooftop conversation with Zemedeneh (Zem) Negatu of Ernst & Young in Addis Ababa, Charlotte Ashton of the BBC and BaldwinBerges of Silk Invest. We were literally overlooking all the activity in Ethiopia. Zem was pointing out that construction is moving so fast that the new buildings are taking away the view from his office.

thiopians love their biscuits and while this facility can produce well over one ton per hour, they are struggling to keep up with demand. Capital investment is needed to take these business up to the next level and satisfy exponential growth of demand.

Baldwin Berges of Silk Invest visiting one of Ethiopia's most efficient biscuit factories.

Zin Bekkali of Silk Invest speaks with Charlotte Ashton of the BBC about the challenges and opportunities of investing in Ethiopia.

The piece can also be downloaded as a podcast

Picture: Baldwin Berges with Charlotte Asthon of the BBC in Cairo