It’s been a very exciting start to the year with a lot of opportunity to invest and profit. We have had dramatic announcements from the Swiss National Bank, the Bank of Canada, and the ECB in developed markets. In Frontier Markets and Emerging Markets, we have seen Nigeria struggle with oil prices, Iraq collapse, Lithuania join the Euro, India cut rates, and King Abdullah of Saudi Arabia die. It’s been hectic, but it has also been an environment rife with opportunity.
What we would like to do, is briefly identify three opportunities which may have escaped your attention in Frontier Markets and give you three markets to watch in 2015. Amongst the volatility and hoopla surrounding global economies, there is still profit to be made and opportunities to be had.
We humbly submit a few items for you to think over.
- The Tunisian Success Story
Tunisia has been a great success since its Arab Spring. Mind you, there are concerns, such as their 8.3% current account deficit, but a -45% decline in energy prices certainly mitigates that to the extent that it is no longer a concern. Furthermore, they are attracting foreign direct investment from areas that were not conceivable a few years earlier. Germany announced a $115mm investment in Tunisia this year that will go specifically to microfinance, innovation and entrepreneurship in Tunisia.
Tunisia successfully completed a free and fair election in December and elected Beji Caid Essebsi as President. The ruling party gave up power in a very clean process and there was little unrest to be seen in the streets. The Tunis Stock Exchange rose 16% in 2014, and the country is now on a roadshow in an effort to issue a Eurobond. Tentative reports indicate that demand is strong despite concerns of issues from neighbouring Libya playing a role in instability in the country.
The equity market is now expensive, with a forward P/E of approximately 29. However, Tunisia has always had a higher P/E ratio than the average Frontier Market. The primary driver behind this is a higher concentration of consumer packaged goods companies, and limited capitalization for natural resources companies. It is not indicative in our opinion of an overvalued market. This also provides an important lesson. Frontier Markets are often so small (approximately $5bn market cap for Tunisia), that the actual nature of the companies listed is essential to appropriately valuing the index’s valuation. The market has a dividend yield of 1.3% which is actually quite generous for Frontier Market standards.
Some of the names worth exploring are Banq Tunisie, and Artes, which is the importer in Tunisia for Renault. The company is attractively valued with a 5.4% dividend yield. Strong free cashflow and growing revenue in a country that benefits disproportionately from falling oil prices. We highlighted this here. If you speak French, you have an advantage investing in Tunisia, but it is certainly possible without the benefit of French; financials are one universal language.
- Things are actually happening in Nepal
Nobody really thinks of Nepal, and that is a shame. Yes, the country is sandwiched between far more interesting and significant countries like India, Pakistan, China, and Russia, but it is still a country with 26mm people and tremendous potential. Historically, Nepal has been attached by the hip to India. This is changing. In a flurry of announcements before the end of the year; China and Nepal signed a currency swap deal, China is raising its aid to Nepal by a multiple of 5 and there are now plans to link Nepal by road to Tibet. India has looked on for now, but one should expect India to also up its ante in Nepal, as strategically Nepal is critical to both countries. The main beneficiary should be Nepal in a Sino-Indian race to curry Nepalese favour.
There is also significant political unrest in the country. This to us is good news. The country has been in paralysis since the abolishment of its monarchy in 2008. Maoists and others are duking it out for a constitution and the development of a government. For us, any change or any indication of change in Nepal is good. If markets were concerned, would Nepal’s index be up 8.7% YTD in USD terms? 9% in a month is a pretty nice return.
Interest rates are expected to decline in Nepal, and banks expect lending to increase when this happens. Prabhu Bank has been one of the strongest performers over the last month. Nepal only has a 57% literacy rate and a high infant mortality rate. It does not take much to cause significant changes in Nepal, and investing today can allow you to enter into a compelling growth story fairly early.
We are bullish on Nepal in 2015.
- Morocco will rebound
Morocco has been muddling along the last few years. The stock market was down 5% in USD terms last year and is flat YTD. The market has suffered somewhat from its demotion from an Emerging Market to a Frontier Market. However, it is important to note that this was primarily a liquidity based issue, not an issue with Morocco’s government, stability, or attractiveness. The market has an attractive 5% dividend yield right now, taxes on dividends is 15%, and the Moroccan Dirham (MAD) is expected to appreciate this year. Moody’s changed its negative outlook on Morocco’s investmen-grade rating to stable (See our debt dashboard). The country will benefit from the oil decline and is expected to grow 5% in 2015.
All of these features make Morocco attractive as an investment destination. We like Morocco for a lot of reasons and it has a reasonably healthy climate for businesses to thrive. One of the themes in Morocco aside from the obvious rising middle-class, is a huge push towards renewable energy. The expectation is that by 2020, 42% of Morocco’s energy needs will be met through renewable energy. This is exciting, as the country expects by 2020 to install 2GW of wind generation capacity.
One of the short-term factors that we think will help Morocco is the fall in oil prices and the impact that this will have on tourism. Morocco relies heavily on tourism for approximately 15% of its GDP. European consumers have benefitted from a tax cut in the form of falling oil prices and asset prices will be buffeted by the aggressive QE program announced earlier this week by the ECB. In sum, we believe this will lead to more invested in Morocco as well as an increase in tourism.
In the market, Ciments du Maroc and Oulmes Etat look interesting to us. Ciments has suffered from historical management that invested in low ROIC projects, but we thinka lot of that pain is behind them. Construction activity is expected to pick up in Morocco and the company’s 4.2% dividend yield helps provide some security. Revenue estimates for 2015 are in the mid-3.5bn MAD range, whereas we think they can easily achieve approximately 4bn MAD in revenue this year. Similarly, Oulmes is a beverage company in the midst of significant growth in its water business. The company is old enough (founded 1933), that it is well-positioned to grow its beverage business in Morocco. The company has a strong and expanding net margin of 7.8%, something rate in the food and beverage business and the company also has a strong 3.6% dividend yield. These types of companies can grow in any environment, regardless of political leadership.
Our goal at Investment Frontier is to hopefully give you something to think about and from time to time, to give you an investment idea or two. In that spirit, these are three things we are bullish on over the next year and beyond.
As always, if you have any questions, please let us know.