Opportunities in the Midst of Volatility

Last week saw some volatility in the US markets, with the S&P 500 functioning like a seesaw. The week of 8/24 started off down 5% between the previous Friday’s close and Tuesday’s close, but then rallied between Tuesday’s close and Friday’s close. All-in, the week closed up almost 1% from the previous week’s close.

So what drove the volatility, particularly the rally as the week progressed? The Bureau of Economic Analysis released a revised second quarter GDP of 3.7% for the United States, beating the forecasted uptick of 3.2%. Personal consumption was up a healthy 3.1%.  

We believe that fundamentals in the US are generally sound. The most recent housing starts data released by the US Census Bureau revealed that month-to-month July housing starts were up 0.2% and year-over-year starts were up 10.1%. Consumer spending, which drives about 70% of the US economy, rose 0.3% for July, while disposable personal income rose 0.5%. Core PCE prices (excluding food and energy) increased 0.1%.

Speculation continues as to whether the US Fed will increase rates in September. We believe that this is highly unlikely. Consumer spending has not gotten out of hand, with the US personal savings rate ticking up to 4.9% in July, up from 4.7% in June. And, as we noted, core PCE prices (a measure of inflation) is minimal. Moreover, the dollar continues to remain strong: a rate hike will only further strengthen an already strong dollar, leading to further weakening and devaluation of other currencies. We are very much a one-world economy now.

To offset the devaluation of the yuan, China sold from its stockpile of US Treasuries last week. Estimates suggest that China controls about $1.48 trillion of US government debt. Our understanding is that China sells its US Treasuries to the market in USD, and then uses those dollars to buy back the yuan, driving up demand for the yuan and strengthening the yuan relative to the USD. We find it unlikely that these actions by the Chinese government to stabilize their currency will be the driver for the Fed to increase rates in September. The effect, if any, will be through the currency channel where the dollar will be weaker.

So again we ask what are the implications of all this for Africa and the global frontier markets? Local currencies and valuations have come down nicely, suggesting nice long-term opportunities for US investors, which active managers like Nile Capital Management are well-positioned to take advantage of. We believe this is an ideal time to allocate to frontier and emerging markets.

The views expressed are opinions subject to change and are not investment advice

Nile Capital Management

We Know Africa: From Cairo to Cape Town

For more information please call 646-367-2820

  

Navigating the Market: Think Long Term

Investor panic over global growth has clearly spread to the US markets, with the S&P 500 Index down 4% for the week and falling below 2000 today. We continue to hear reports of challenged economies across emerging markets: China’s slowdown, the yuan’s devaluation, disappointment with India’s Modi, and the fallout to other Asian economies including Singapore, Hong Kong, and South Korea top the news. And, while investors in US equities had been able to stomach much of the angst related to Greece and China, this week even those investors finally gave in.

So what about Africa? The news has been mixed there too. On the more positive side, South Africa’s reported inflation rate of 5% was in-line with expectations, and some investors think that the Rand is poised for a rebound. On the other hand, the currency devaluations in China and Kazakhstan has prompted investors to expect a devaluation of the Nigerian Naira, despite government reassurances.

We appreciate what we are seeing in Kenya: think long-term despite short-term challenges. Clearly, like most countries in this economic environment, Kenya has had its share of challenges. This week the country’s Fluorspar Co. cut its annual production of its steelmaking ingredient forecast by 19% due to weak demand stemming from a tough global economy along with increased competition from new entrants. Most of Kenya’s output of fluorspar is to India and Europe. Despite these near-term challenges, however, Kenya continues to invest behind its long-term infrastructure, with the country’s Ports Authority planning to borrow $328 million to finance the expansion of the biggest harbor on the southeast coast.

In fact, this is the thinking we encourage investors to sustain during these challenging times in the markets: think long-term. Valuations have clearly come down in still to be developed regions like Africa. As examples, year-to-date, Nigeria’s NGSEINDX, Kenya’s KNSMIDX, and South Africa’s JALSH are down 11%, down 11%, and up 0.44% respectively. Yet, the IMF still expects growth in emerging and developing economies to grow 4.7% in 2016, with improved conditions in Russia, some countries in the Middle East, and North Africa. This projected growth rate for emerging and developing economies is in comparison to the 2.4% growth rate projected for advanced economies in 2016.

Moreover, we remind investors that our approach involves an active management investment strategy, where we seek to invest in the most attractive regions and sector themes available. As such, we underweight regions that face significant challenges, such as Nigeria. And we seek to invest in sector themes that fit in with a long-term growth outlook, such as infrastructure investments and a rising middle class consumer.

The views expressed are opinions subject to change and are not investment advice

Nile Capital Management

We Know Africa: From Cairo to Cape Town

For more information please call 646-367-2820

China, History, Politics, and Business points to Africa

When looking at history, politics, and business, we think the stage is set for investors to consider increasing their investment and allocating a portion of their portfolios to the Africa region.

China. The chart below clearly indicates that investors have been rotating money into the US markets as China goes into decline. While these two countries represent the largest economies, are they really the only options for investors to allocate money into? Moreover, if history were to repeat itself, then, if the Chinese markets were to fall into the abyss that some investors are predicting, we think the US markets will dip significantly too, as China did during the Great Recession. Finally, with the S&P and Nasdaq charts reaching a high and social media recently showing some signs of adjustments from sky-high valuations during earnings season, we wonder if there could be a broader market correction on its way.

In our view, China is now moving into the position of becoming a more mature emerging market. Stocks in such markets will tend to be more liquid and subject to broader risks and volatility, as compared to still budding markets like Africa where liquidity and equity coverage is less, allowing for attractive long-term growth opportunities while minimizing extreme risks. We also add that further uncertainty arises from the fact that this is the first major market decline driven by China since the country became a significant driver in the global economy: we just do not know how the government of China will react.

Signs of China falling into decline offered recently include a PMI of 50 showing no signs of growth; slowing flow of imports with a rise of only 0.7% in 2014; and a slowdown in construction businesses related to China at Caterpillar and United Technologies. In such an environment, investors will have to be extra careful on where they invest in China, both in terms of sectors and individual stocks. We argue that, if investors are going to have to take that stance on China, then why not allocate a portion of the risk to beaten down regions like Africa, where active managers are proactive in choosing the best regions and best stocks within them?

Politics loves business, and business loves politics. Now about 6 years after the end of the Great Recession and with Americans adjusted to the “new normal,” President Obama visited Africa last month in July 2015. To us, this action harkens back to 2001 and 2002 when President Bush visited China just as the Recession of 2001 ended, with the US then poised for recovery. Back in 2001 and 2002, investors were not fully aware of the big player that China was about to become. Similarly we note that in March 2006 President Bush visited India, and, since then, India has grown to become a major power in the global economy.  

Again, if the past is a prologue to the future, we suspect that President Obama’s open support in developing Africa’s infrastructure suggests that major global businesses will be investing in Africa for the long-term. We also note that, as US corporations have become more comfortable in investing

and developing their businesses in Asian and BRIC regions with less infrastructure and more uncertainty, their commitment to Africa will be firm. With valuations down as the USD strengthens, we think Africa provides attractive valuations and a good entry point for investors. 

The views expressed are opinions subject to change and are not investment advice

Nile Capital Management

We Know Africa: From Cairo to Cape Town

For more information please call 646-367-2820