My Beauty Best Teacher

The Economist writes about emerging markets being the flavor to the moment,are they?:

Back in 2002, emerging-market bonds offered a yield a full ten percentage points higher than American Treasury bonds. This year, although spreads have widened from the historic lows seen in May, they have settled at a modest two percentage points or so.
The performance of the equity markets has also been impressive. The MSCI emerging markets index has risen by nearly 40% so far this year, a remarkable achievement given the credit crunch and geopolitical worries. Although China's stockmarket has more than doubled, this is not all about the People's Republic; the Polish, Indian, Brazilian and Pakistani markets are all up by more than 40%.
Indeed, investor focus is now shifting towards what Michael Hartnett of Merrill Lynch dubs “the emerging emerging markets”, such as Botswana and Kazakhstan. MSCI is in the process of launching a benchmark for such exotica called the “frontier market” index.

The Washington Post reports on Frontier markets:

"A lot of hidden gems are no longer hidden," said Hugh Hunter, head of global emerging markets at WestLB Mellon Asset Management. "Clearly, frontier markets are the next tier. . . . We have no option but to go forward in this area."...Aside from the need to keep looking for new investment opportunities, Hunter and others say, economic growth and development of the capital markets have turned some frontier markets into appealing, long-term investments for those with a healthy appetite for risk. Money managers view the frontier economies much as they did the emerging markets of a decade ago. They are hopping on airplanes to visit countries where as few as a half-dozen companies are listed on the local stock exchanges.

Oz ponders "Emerging Emerging Markets":

For the past 10 years the Nigerian economy has swung back and forth between emerging market, frontier market and even underdeveloped economy, as perceived by institutional investors. Personally I find it difficult to to tell the difference sometime.I am of the opinion that Wall Street is acutely tunnel visioned when it comes to recognizing the impressive changes that the African continent has undergone in the last ten years. This is why I find it difficult not to be cynical sometimes when ‘premier’ analysts sometime tout the equity markets in Nigeria as the next big thing...[continue reading]

Richard Gnodde writes in the FT:

For the past five years we have seen a strong period of global growth and wealth creation driven by the opening of new markets, financial innovation, favourable credit conditions and disciplined corporate management. Perhaps more striking has been the breadth of this growth – across geographies, asset classes and industries. We have one global economy, but it is increasingly powered by multiple engines, with multiple sources of demand and liquidity.
The new flows go beyond the increased investment in emerging markets to include investments from those markets into mature economies, and cross-border investments between emerging economies. Since 1990, cross-border capital flows have grown more than 10 per cent annually. Over that period, capital inflows to emerging markets have grown twice as fast as inflows to developed countries. Investment flowing to developing countries now accounts for nearly half of world total FDI inflows, compared with only 20 per cent in 1990. Even excluding China, the share doubled to 32 per cent.

Emerging Markets reports on SSA debt markets:

If domestic debt markets are to develop, it is also vital to improve local debt management, which has generally lagged behind efforts at debt relief. Countries need a clear debt management plan(pdf) and issuance strategy(pdf), which might include publishing a debt management report, lengthening the yield curve, building benchmark issues as conditions permit and widening the investor base

The limited size of local debt markets means that not all financing needs can be met domestically, and external commercial borrowing may also be cheaper than domestic debt, by removing the inflation and currency risk faced by international investors. Finally, it also fits in with the need to maintain a diversified funding mix. African governments now seem ready to test international investor appetite with sovereign issues, and Ghana’s milestone Eurobond issue in September points the way – the Ghanaian government could not have raised $750 million at a yield of 8.5% in the local market. African companies have also been active in the international market, especially telecoms and banks, and we believe international bond issues will be a significant feature of corporate Africa going forward.

A report from the Boston Consulting Group states:

Never before have so many potential competitors and customers arisen so quickly on a global scale. Moreover, the challengers have completely different approaches to competition, taking advantage of their bases in emerging markets. Many established industry leaders are frankly unprepared for these new types of competitors

Writing in the FT Chuka Mordi of Nex Rubica stated:

Outside South Africa, Sub-Saharan African capital markets represent the last frontier for the unhindered flow of global capital. The problem has always been the absence of the combination of scale and local expertise required to attract global fund managers...There is currently not enough depth in the Nigerian market - its market capitalisation is $31bn, total issue of government bonds about $4bn - to support such a large inflow of cash without overly inflating the market. But the Nex-Rubica forecast is for this size to double between now and the final quarter of 2007, surpassing Egypt by 2008...In the last year, the outperforming stocks on the Nex-Rubica Africa Top 40 Index, have been Nigerian financials. One key attraction is that the risk/return profile in the Nigerian market is generally uncorrelated to western markets. Starting from a relatively low base, Nigeria alone has the momentum in terms of its population, resources and growth potential to catapult it to the first rank of emerging market economies.

The WSJ writes:

The global credit crunch has shaken the kaleidoscope of the world economy. As sub-prime lending problems ricochet around the world, capital is seeking new places to grow. And it is looking farther afield than ever before -- not just to the well-established emerging economies of China or India, but to "emerging emerging" markets in Africa...Their success has been driven by getting the fundamentals right. Nigeria has benefited from banking and pension reform, a crackdown on corruption, debt relief based on sound fiscal policy and the high oil price. Perhaps more remarkably, Ghana has achieved its success without oil windfalls. A strong technocratic team in the top ministries has pushed through a homegrown reform program which has rationalized the electricity sector, led the development of a domestic debt market, and freed up capital controls. There is nothing to stop the rest of Africa following this lead. And the signs are encouraging: The IMF expects sub-Saharan Africa to grow 6.1% in 2007 and 6.8% in 2008.

In Barron's:

To many Western investors who don't look past the stereotypes, Africa is terra incognita. Their ignorance could cost them plenty in lost opportunity.Take the U.S. Chamber of Commerce, which in a survey last summer revealed that "over all, U.S. businesses do not view Africa as an attractive place to invest. The image of lawlessness, corruption, unstable governments, an inadequate infrastructure, uneducated or untrained people and an unwelcoming government attitude toward business serve as major deterrents."That depiction is increasingly mistaken...after a big drop from boom highs in early 2008, African stock markets—despite their problems—now offer the long-term investor a number of fast-growing companies with stocks that sell for about 11 to 12 times trailing 12-month earnings per share as of June 30, according to S&P Indices. They look inexpensive compared with price/earnings ratios in most developed markets or even in the broad world of emerging markets, where the average stock fetches 15 times trailing profits.

Businessweek reports:

Banking powerhouses including Citigroup and JP Morgan operate in sub-Saharan Africa, but last week Russian investment bank Renaissance Capital (RenCap) showed signs of things to come as it bought stakes in brokerages in Ghana and Zambia...Mr Cornthwaite(of Rencap) said: "The situation is similar to our experience in Russia 15 years ago. There is a business opportunity here, and if you've seen the movie before, you're in a better position to capitalise," he said.

India and Africa have similar markets, value systems, levels of development," says Sunil Mittal, chairman of Bharti. "Emerging markets make sense for us."Especially markets in Africa, where connections to India run deep..."If we don't step in today, we will lose a huge market 15 years from now," says Malvinder Mohan Singh, CEO of drugmaker Ranbaxy Laboratories, which operates throughout Africa.

From the IMF's Regional Economic Outlook for Sub-Saharan Africa,2008(PDF):

The term “emerging market” was coined in 1980 to refer to countries that had stock markets and were in transition toward having the features of the mature stock markets in industrial countries.This box suggests that some African countries fit within the emerging market group and supports this view by benchmarking these African economies of 2007 against the ASEAN countries (Indonesia, Malaysia, Philippines, Singapore,and Thailand) of 1980, when the term “emerging market” entered the lexicon.
Selected African countries compare favorably with the ASEAN countries of 1980. The ASEAN countries were already experiencing strong economic growth. Yet, in many other respects, the ASEAN countries looked quite different from what we see today. Inflation rates were still high in some cases, the depth of their financial sectors was limited, foreign direct investment had yet to accelerate, and their financial
resources, reflected in international reserves, were adequate but not high. Many African countries have perhaps reached broader macroeconomic stability than the 1980 ASEAN benchmark. Growth is strong, inflation moderate, and international reserves relatively high. Like ASEAN, financial depth remains limited.Foreign direct investment is quite high, although this is in large part a reflection of the larger share of naturalresources such as oil in the case of African countries.2 Debt-to-GDP ratios are low.

In the Economist:

...a combination of challenges and opportunities is producing a fizzing cocktail of creativity. Because so many consumers are poor, companies have to go for volume. But because piracy is so commonplace, they also have to keep upgrading their products. Again the similarities with Japan in the 1980s are striking. Toyota and Honda took to “just-in-time” inventories and quality management because land and raw materials were expensive. In the same way emerging-market companies are turning problems into advantages....the emerging markets are developing their own distinctive management ideas, and Western companies will increasingly find themselves learning from their rivals. People who used to think of the emerging world as a source of cheap labour must now recognise that it can be a source of disruptive innovation as well.

Marion Mühlberger of Deutsch Bank Research wrote(pdf) in June 2007 about the lack of USD-denominated investment opportunities within Nigeria:

The redemption of the Brady bond by Nigeria last November has considerably reduced USD-denominated investment opportunities. As investment options in USD and EUR are scarce, institutional investors go for synthetic bonds, so-called credit linked notes. Another option is corporate bonds, e.g. USD-denominated bonds issued by large Nigerian financial institutions. However, these entail additional company-specific risks and frequently require a very high minimum investment. The stock market also offers very few opportunities for private investors as emerging markets share certificates in the past did not cover Nigeria at all due to a lack of liquidity in the market; at present, this is the case to only a small degree. But the Nigerian capital markets are making quick progress so over the next few years we will see improving investment opportunities in the country

Merrill Advisor's Stan Luxenburg reports:

The market capitalization of listed sub-Saharan companies has climbed from 89% of GDP in 2000 to 137% in 2005, according to the World Bank. That suggests
a sharp rise in the valuation of African equities...While every major company on the Chinese and Indian exchanges may be followed by as many as 30 analysts, an African stock does wellto catch the attention of five. But equities in more popular Chinese and Indian markets are also much pricier than African shares. “If you look at price/earnings ratios or price/sales ratios, the other emerging markets are an awful lot more expensive than stocks in Africa,” says Merrill Lynch’s Rasco.

Paul Kedrosky writes:

While frontier markets in Africa are not yet the new Brazil, let alone the new South Korea, there are ample reasons to be optimistic about the economic resurgence in many African countries.

Consider:

• The number of armed conflicts in Africa has dropped from 20 in 1999 to 5 today. Granted, that's non-zero, and the human losses in the remaining fighting is horrific and unacceptable, but there is significant and largely unheralded change.

• Real GDP growth in sub-Saharan Africa (SSA) averaged 4.1% from 1997-2002, and has since risen to 6.6%

• Real incomes are rising, with GDP per capita hitting 4.6% in SSA in 2007.

• Africa has lower inflation, higher FX reserves, and more FDI than did Asian emerging markets in 1980 -- and that worked out okay.

• We're seeing bond duration extension, with government bond yield curves now stretching out to 10- and 15-years in some countries, which is a boon to project financing.

Rob Griffin of The Independent reports.

An economic revolution driven by the booming global demand for commodities over the past few years means the corporate world can no longer afford to ignore fast developing nations such as Nigeria, Botswana and Ghana...

A lot of politically stable countries endowed with resources such as oil and commodities have succeeded in strengthening their reserves, stabilising interest rates and providing a much better environment in which to operate," he says. "They have also benefited from the development of capital markets in the region.

Sub-Saharan Africa - excluding South Africa - rose by an impressive 38.2 per cent and were not affected by either the March correction, which hit a number of rival emerging markets, or the Nigerian presidential elections a month later. This compares with a relatively modest 10.2 per cent rise for the MSCI Far East index and a fall of 5.5 per cent in the MSCI Eastern Europe.

Another serious concern is the continent's power supply problems. It is estimated that more than half of sub-Saharan nations are now facing crippling electricity shortages with blackouts becoming increasingly common."In many ways Africa is a victim of its own success as the higher-than-expected GDP growth has put a huge strain on the electricity supply, which is causing problems as there hasn't been any major investment in the industry for 15-20 years," Mr Thomson adds. "On the positive side, however, you can make money by investing in companies that are building power-producing capacity in the region."

Chamberlain S. Peterside writes

At the end of the day it’s a question of making strategic cost-benefit analysis that stretches beyond your comfort zone. For one, companies/entrepreneurs must constantly strive to uncover new grounds rather than rest on their laurels or else they will soon become extinct. For companies looking to scale higher altitudes in sectors like natural resources, technology outsourcing, telecommunication, low-cost manufacturing, consumer goods/services retailing, infrastructure development and the like, some of the emerging countries present stupendous growth prospects that are impossible to ignore, as reflected in the colossal volume of potential consumers and resources – China is estimated to have more mobile phone users than the whole of US population, India’s middle class is almost equivalent to the total population of Western European, while phone subscription in Nigeria grew from less than 700,000 to over 25 million within 5 years (2001-2006), according to published data.

PSD Blog reports on the WSJ's coverage of Africa's Bull markets:

The continent's so-called frontier markets, such as Nigeria, Kenya, Ghana, Mauritius and Botswana, are up an average of 26% so far this year in dollar terms, according to Liquid Africa. By comparison, the MSCI Emerging Market Index, which includes just three African countries -- South Africa, Egypt and Morocco -- has risen 9.5% during the same period.

If you haven't heard this story, it's because the numbers are still small. The London Stock Exchange is five times as big as all African stock markets combined. And South Africa's exchange is 2/3 of the African total.