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A new round of emerging market investment opportunities

David Brenchley  |  15 Jun 2018Text size  Decrease  Increase  |  
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Nigerian street market, egypt, kenya, economy, stock market

The Middle East has undergone reforms in order to make itself more attractive to foreign investment in recent years. The United Arab Emirates is one key example of this trend, with Dubai becoming much more prominent in the global financial sector.

Now, African countries are beginning to take on the mantle, becoming reformist nations in their own right. As a result, the continent is becoming increasingly attractive to various global fund managers, including UK-based manager Ashmore. It has tripled the African weighting in its Emerging Market Frontier Equity to 30 per cent  over the last two years.

Three countries in particular have caught the eye of the group: Egypt, Kenya and Nigeria.

The former is further ahead along its road to reform than the other two, having come through some particularly tough times; the Arab Spring in 2011 and the Muslim Brotherhood coming to power the following year.

However, the current Egyptian President, Abdel Fatteh el-Sisi, has been making some tough short-term decisions that Brudenell hopes will bring considerable long-term benefits. The country has substantially devalued its currency, reduced subsidies and tried to protect the more vulnerable in society.

As a result, consumer sentiment is picking up, inflation is coming down and the economy is improving.

Improving governance

Kenya, meanwhile, is taking big steps towards improving the governance of the country. For example, it recently re-ran an election that was contested by the main opposition party – hugely significant in a part of the world where many perceive elections to be rigged.

Other slightly unorthodox and inefficient policies that plagued the country previously have been reversed, such as capping interest rates on bank lending. It is also benefitting from some welcome respite from climate-related issues such as droughts.

Nigeria is "a year or so behind Egypt" at the moment, according to Ashmore portfolio manager, Andrew Brudenell. When oil prices and, subsequently, their own oil production capabilities collapsed, it failed to take action and adjust its currency.

That was a mistake that it has now remedied. "There’s much more confidence now in foreigners believing that the exchange rate is real, that you can put money in with a more sensible rate and take it out again if you want," explains Brudenell.

"That’s crucial, especially as the country imports everything and FX needs to move and to function properly."

While the upcoming election is currently causing uncertainty, that’s not because an unpopular candidate has a chance of triumphing; rather just that no one knows who will win.

Shareholder-friendly investing

On the equity investment front, Brudenell says all three countries have stock markets that are diverse and liquid with management teams that are competent, shareholder friendly and that have been through tough cycles.

One area Brudenell likes in these countries is the cement sectors, particularly in Nigeria. "We look for exposure to physical infrastructure and cement is involved in building a lot of that – whether it’s roads, bridges, ports, power stations," he explained.

He shared an investment adage that suggests if you like a country’s economy then you should like its banks, which he does.

Brudenell also likes consumer plays, where he says investors can find particularly well-run companies. These have had a tough time recently, with adverse currency moves raising the prices of importing raw materials.

But they, too, have made changes in how they source those materials, "becoming more domestically sustainable and self-sufficient" he says. "That will be reflected in margins, just as volumes and demand returns as well."

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David Brenchley is a reporter for Morningstar UK.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

is a Reporter for Morningstar.co.uk.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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