Nile Capital's Thoughts on the First Quarter of 2011

Nile Capital has recently published its results for the first quarter of 2011, and we wanted to share some of our thoughts. Below are some excerpts from the quarterly report - for the full version, please request a copy at info@nilecapital.com

Performance in Africa's markets for the first quarter was challenged by the effects of political unrest, most notably in Egypt and Tunisia. The Egyptian market was closed from January 27th to March 23rd, and re-opened significantly lower than its January levels. Investors were thus adversely impacted by the correction, and a significant portion of weakness in Africa in the first quarter can be attributed to Egypt. However, although the political upheaval in Egypt caused short term turbulence in markets, we believe the long term impact of an improved and more stable political system will be beneficial for long term growth.

Africa Region Fund Flows (%)*

Performance in Africa was also impacted by capital outflows from international markets, with stronger than expected US economic data encouraging investors to re-balance back to the US. As a result, fund flows to Africa turned negative in the first quarter of 2011 but have since rebounded from off their lows. Fund flows had been vastly positive throughout the previous 12 month period, with substantial growth in the second half of 2010. Nevertheless, we continue to believe that growth will remain slow in Developed economies, and that expansion in Emerging Markets (and Africa in particular) will remain significantly better than in the Developed world.

Overall, Africa's markets were mixed for the first quarter. Aside from Egypt and Tunisia, whose markets were down on political unrest, much of the Continent’s underperformance came from he larger markets of Nigeria and South Africa, where fund flows drove returns.

Outlook

We believe our investment case for Africa continues to be underpinned by both global and regional growth dynamics. Although Advanced economies have outperformed Emerging and frontier markets in the first quarter of 2011, we believe that their long term growth is constrained by large fiscal and budget deficits, and these economies will have to raise taxes or cut spending to improve their fiscal conditions. In addition, monetary policy pursuing low short term interest rates (or ‘quantitative easing’) and dollar depreciation as a method to stimulate aggregate demand will lead to capital outflows to Emerging economies in search of higher yielding assets. As a result of these policy measures, we continue to believe Advanced economies will experience lower long term growth. Although in recent months positive data has implied a better than expected recovery in the US, the IMF believes that Advanced economies overall will grow by approximately 2.4% annualized over the next five years.

On the other hand, Africa’s growth is projected to be in excess of 5.4 % annualized in the next five years according to the IMF. In fact, the IMF has projected that Nigeria (the second largest Sub-Saharan economy) will experience GDP growth for the next five years in excess of 7% annualized, with the potential to do even better on the back of sustained high oil prices. A number of African countries have pursued stable monetary economic policies, and have better fiscal balances and low leverage. We believe this macroeconomic background continues to support the case for investing in Africa’s stock markets. In addition, we continue to believe that demand for natural resources and agricultural commodities, the need for infrastructure investment, and growing consumer demand will continue to be drivers on the continent. If anything, we feel that recent weakness presents a compelling opportunity for long term investors to enter Africa’s markets.

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com.

We know Africa - from Cairo to Capetown.

*Chart sourced from EPFR