It has become quite obvious to any observer today that this century belongs to both China and India. Today China accounts for 30% of economic growth and is the world’s second largest economy in Purchasing Power Parity terms while India is slowly but surely giving up on its license Raj ways and rising. For those of us who follow human history, it is simply Asia taking back the place it held before the enlightenment.
Over the past few months, I have had the chance to witness Indian companies at work as they expand abroad into new frontiers. What I find fascinating today is the confidence with which Indian and Chinese companies are expanding. To give an example, the asset management arm of India’s Religare group (a group which now owns 40% of the IPRO Group) plans to continue to aggressively grow its business in the coming years with an aim to manage more than 100 billion dollars over the next five years. This will mainly be
achieved via acquisitions and partnerships especially in the private equity space.
What I admire about Asian companies today is that they are aggressive as well and have this can-do attitude which reminds me of the America of the 1990s. As the western economies continue to struggle along, Asian powers are gradually taking over and are working at shaping the future of the world itself. Asian companies understand that the west is in relative decline and that investments must be diversified.
Mauritius is a fiscal arbitrage heaven
Mauritius sits in the middle of the Indian Ocean and should aim to become a gateway to both Asia and Africa. Of course politicians and other observers have made such comments before, but unless we understand the challenges which we currently face as a nation and give out more specifics on the vision which we have, the world will gradually realize that we are selling dreams and not reality. Today the financial sector in Mauritius is a fiscal arbitrage heaven. We as a nation are mainly a platform and have lots of work to do in terms of added value creation.
Take the India business for example. We are but a mere platform for special purpose vehicles that use this treaty which we currently have (and may not have in the same avatar forever) to invest in booming India. Even at IPRO, we have had to work hard at becoming an India and Africa focused fund manager. There is after all no future in the fund of funds structure that most local asset management companies follow if growth and regional expansion is a part of their plan. Doing equity research and understanding the dynamics of the Indian and African markets were quite challenging as we aimed to add value along with our partner.
Mauritius has the vision but lacks on the specifics. Our politicians talk a lot about Africa but we have yet to get our human capital base to properly understand its complexity. Our education system still relies heavily on memorization, and out of the box thinking has yet to be encouraged properly. We talk about cyber cities, but yet have some of the slowest and most expensive internet services around. We build Ebene from scratch but yet forget to plan for proper parking and engage in the same old savage construction with multi-coloured buildings with no sense of municipal planning.
Our local stock market still charges 1.25% per trade, which is ridiculously high, and it remains quite illiquid with many stocks having the ability to move substantially with 100 shares traded in 2011. We talked about having a derivatives market on equities, but failed to realize that unless we improved the liquidity characteristics of this market, there would be no market makers and no derivatives market.
The average Mauritian today knows more about horse racing and Manchester United (the opium of the masses!) than he does about either Africa or India. I was surprised to find out that even in the elite circles, conversations only added local politics to the floor. There is nothing wrong in that of course, but then again we need to know more than what is happening inside our little coconut shell.
We do not have enough libraries and we are producing far too little mathematicians and engineers. An engineer can do better finance any day! There are of course exceptions, but we can and need to do better, for this century shall be more competitive than the last. We have achieved a lot as a nation over the past four decades, but we have become too complacent, unreceptive to criticism and comfortable with our past success. We need to work on the specifics department and add substance to what we wish to market to the world, for the world will eventually see through paradise for what it really is. The children of Singapore are taught from an early age that theirs is a small nation that needs to understand Asia along with its complexities. Singapore is a nation of investors and Mauritius needs to become one too.
Africa is the next growth frontier
Africa is the next growth frontier. Over the past year, all I have been doing and thinking about has been Africa as my company seeks to grow its African presence. To understand Africa, you must have your boots on the ground and you must believe in the story. What I can tell you is that this is a continent of opportunity. Over the next five years, Ghana shall become one of the largest oil producers in Sub Saharan Africa. The Chinese are already there and the Indians want in as well. Ghana is working on developing its equity market and the future IPO of Tullow Oil has attracted huge foreign interest. Ghana’s stock market has been dominated by Anglo Gold Ashanti, but as this market develops, it shall become more attractive to outside investors. There are pockets of progress in once troubled states as well. After all, the Bank of Kigali shall soon be listing!
Nigeria is another interesting investment prospect. In 2006, however, they had what I call an oops moment as policy makers encouraged banks to merge without paying too much attention to the fact that some of these merged banks were undercapitalized. Nigerian banks also did something silly by lending heavily to real estate and equity investors. Since the pre Dangote Nigerian stock exchange was dominated by bank stocks, creditors were lending to investors who were buying up bank shares.
When the financial crisis hit, things turned badly. Nigeria has come a long way since that time as many Tier 1 banks have recapitalized nicely while the few remaining troubled ones have until this September to recapitalize. This came at a USD 15 billion cost of course as policy makers had to create a vehicle called the Asset Management Company of Nigeria to buy up toxic assets. The central bank has had to keep real interest rates negative to help out the banks, and it has only recently begun to tackle the inflation problem properly.
Tier 1 banks such as Zenith have loans to deposit ratios of 55% in an economy that is growing above 7% and their price to earnings and book ratios are extremely attractive especially as profit growth is rebounding. Credit growth remains weak and hence interest income growth is weak, but other fee income and cost cutting have helped out. Credit growth should begin to pick up as Nigeria recovers, and hence those low loans to deposit ratios will have much room to increase. Tier 1 banks are also pan Africa banks, which makes them attractive to long term investors. Slowly but surely foreign investors are coming back to Nigerian equities.
So far banks have been busy improving asset quality, and increased Government bond purchases have crowded out the private sector from getting access to loans. Indeed the Central Bank of Nigeria itself has had to lend directly to the private sector with credit like assets totalling to a whopping 3% of the country’s GDP. The amnesty to rebels has helped the oil sector, and a more stable political climate post the recent elections bodes well for Nigeria.
Nigeria is aggressive in correcting its mistakes and is being quite specific about the vision which it has. Nigeria’s budget assumes a $75 a bbl oil price, which means that things are looking up for the economy.
Nigeria is setting up its own commodities market to rival Mauritius’ Global Board of Trade (GBOT), and more importantly they got the human capital to make their financial sector a success. In the coming months, bar Tier 1 banks, Nigerian Government debt is likely to become quite attractive after the recent lifting of certain capital control rules on foreigners.
Nigeria’s ten-year bond is yielding 10 to 11% with the central bank expected to tighten further throughout the year while inflation stands at a still too high 11%. It is showing signs of peaking however, and as policy rates and long term yields rise and real rates become positive, foreign interest shall increase, and the Naira shall stabilize and face appreciating pressure.
Tanzania and Mozambique are on their part working at the reform front to attract foreign investors. Africa is home to 60% of the world’s arable land and is increasingly becoming a major private equity play. Rising Asia shall need to work on its supply chain if it ever wishes to have empires again. Africa is that supply chain hub as it is blessed with natural resources.
But Africa is much more than that. Africa has a young population, and should policies in those various countries be properly formulated, investing in the consumer sector shall pay off handsomely.
Understanding the politics of it all
Of course, not all is rosy in Africa and it is important for Mauritians to build on their understanding of the continent.
Côte d’Ivoire’s regional stock exchange was closed for a good part of the year as the cocoa industry quietly supported a dictator who was finally replaced. Kenya’s shilling has been depreciating steadily this year due to high dollar demand as growth prospects remain dim for the year while inflation continues to bite.
Egypt’s stock market is down 22% year to date and is still trying to find the right formula to become another Turkey. The good news for Egypt and us as investors is that unlike in the 1990s, Muslim extremist groups were not at the forefront of this revolt which kicked out Hosni Mubarak. This was a genuine call for democracy by a young nation that thinks that it deserves better.
In general, education is a problem in Africa and is perhaps the biggest impediment to it moving up the value chain. Even in countries where schools and universities exist (I shall include Mauritius in this list), bad policies and improper funding have put a cap on quality improvement. Of course Mauritius is ahead of most African countries in terms of development, which is where we can add value.
Go talk to an African today, he wants to invest in Africa as he believes that it is his time to shine. They do not wish to buy investment products of other countries. We realized that in Botswana quite early. They do not always have the required know-how in terms of development and investment, and we can add value there. While the JP Morgans and the South African fund houses are trying to sell Africans investment products that revolve around the west and Asia, we have found multiple opportunities to sell products that are geared to their own region, and they like this.
Investing in Africa requires patience, for frustration is part of the game, but then again potential returns are extremely attractive. You know how in Mauritius, if a certain company has good relations to the government of the day, contracts may flow its way and change its fortune and its stock price, well it is the same in Africa too. Understanding the politics of it all is important in Africa, and each country is different and has its own strengths and weaknesses.
While the challenges for Africa are many, the opportunities are even greater and in any event better than those of Europe. If we wish to be an island nation heavily coupled to the Europe story, then we have no future. But if we wish to work hard at improving our understanding of Africa and India and finding better ways at adding value versus being a tax arbitrage platform, then our future shall be as bright as the mother continent itself. We must move fast, however, in order to corner our respective niche markets, for bigger players will eventually learn and beat us to it. Mauritius must hence add substance quickly to what it claims to offer to the world.
By Sameer Sharma,
The author is a chartered alternative investment analyst and a certified financial risk manager. He is also the Head of International Funds at IPRO Fund Management.
Courtesy : Conjoncture, A Bilingual Journal of PluriConseil.