Population-based investing re-examined


Population-based Investing re-examined

At Investment Frontier we are a little obsessed with demographics.  We laid out our position over three posts:

The Population Problem

The Population Problem and Opportunity

The 30 Best Countries to Invest in for 2050

30% of our weighting on countries worth investing in came from our belief that population is one of the fundamental determinants in achieving strong long-term equity returns.  To that end, we present you with the London Business School’s Economic Yearbook 2014.  This is a must-read.  They have done an extremely thorough study on Emerging Markets’ equity returns, using data from 1900.    See the figure below for the results of the study.

Economic Factor Returns - EM

As you can see, the higher future GDP, the better the returns, but only to an extent.  The primary learning from this study is summarized quite well by The Economist Buttonwood’s notebook.   GDP per capita growth and past GDP economic growth are not useful metrics for assuring future growth in equity investments.  However, there is a decent correlation between equity returns and aggregate real GDP growth.  The real part is key, inflation is good to an extent (about 4%), and after that it has a negative impact on returns.

Aggregate GDP, driven by population growth results in positive equity returns.  This is a critical component of our assessment of where to invest.  We consider other factors, and as can be seen by the correlation of equity returns to aggregate GDP (0.51), just population growth and related GDP growth is not sufficient to warrant investment.

As an example of population-based investing, we provide a preview of our upcoming equity report on Bank of Kigali.

Bank of Kigali

Bank of Kigali (BOK) is Rwanda’s largest bank.  The bank was started in 1966 and had an initial public offering in Rwanda in 2011.  It is a full service bank with a keen eye on growing a nascent capital markets’ business in Rwanda.  The growth potential is tremendous.  Rwanda is a country of 12mm with an attractive growth profile and the country as a whole only has 1mm retail accounts.  The runway has been built, but the take-off is yet to start.

The bank has a 29.1% market share in Rwanda, and this has managed to grow.  There is a lot of concern out there that they won’t be able to sustain their market share, but we do not feel that way.  A 1/3 share of market for a national market is not atypical.

BOK has the highest corporate governance of any bank in East Africa that we have dealt with, from their reporting, Board of Directors’ quality to the proven ability of management.  This is a company with a developed-market level of corporate governance and is trading at only an 11x forward P/E; it is a value-priced stock with a growth trajectory.

From 2008 to 3Q 2013 BOK has had a CAGR of 22.1%, customer deposit concentration continues to decrease.  Yes, the stock has doubled over the last year, but revenue has increased by approximate 50% over the same time frame.  The bank had 65 branches at the end of 2013, and expects to have 100 by 2017.

The only significant risk to this company, and the factor that makes us a little hesitant to suggest that BOK is the buy of the year, is the net interest margin.  At 11.6% it is significantly higher than 9.6% in 2012, and an average of 9.2% over the last six years.  We do not believe this is sustainable.  Over the long-term this will contract, and it will contract sharply.  The only question, is how long can this type of margin last?

Please look out for our detailed report on Bank of Kigali.  We expect to post it in the beginning of March.

As always, if you have any questions or concerns, please let us know.


Investment Frontier’s owner is a holder of equity in Bank of Kigali.

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