African Assets: Still A Convincing Case
As the rally in the more common emerging market assets starts to look shaky, I see a number of reasons to like what’s on offer in frontier markets, Africa in particular. To my mind, the two assets that really stand out are Nigerian equities, and the Ugandan shilling.
In the case of Nigerian stocks, I see a number of reasons to be positive, not least the recent conclusion of the central bank’s audit of commercial banks. Yes, there were serious problems with reporting standards, and exposure to margin lending (real or feared) is still a risk, but I’m confident that the market has priced in the worst. A quick look at the monthly chart should confirm this: the index is trading at 22,100, roughly the same level as in 2005.
Lagos All-Share Index
A second cause for optimism is the Central Bank of Nigeria’s drive to clean up the banking sector. The governor of CBN has already made the necessary recapitalisations, and the move to get banks onto a common reporting standard in December 2009 should be a big boost for longer term confidence. In fact, there are already rumours circulating that a number of foreign banks, including Barclays, are in the running for a share of the distressed banks.
As for the Ugandan shilling, the reasons for our optimism are both technical and fundamental. With respect to the former, the shilling recently moved through a key area of resistance at UGX1,870/US$ – a move I think will unlock gains all the way to UGX1,700/US$, or perhaps higher. While I realise that the shilling has historically been vulnerable to large aid flows, it is also one of the few African currencies in which foreigners can transact freely, not to mention that any profits earned in doing so are not subject to local taxes.
Ugandan Shilling, UGX/US$
Over the longer term, the main factor that will drive the shilling’s appreciation is oil. After three years of drilling, Uganda’s UK-based partners reckon that proven reserves are around 2.0bn barrels, with some commentators suggesting that figure could even rise to 6.0bn. Either way, for an economy the size of Uganda’s, this kind of discovery will draw foreign investment on a considerable scale, whether for refineries, pipelines, or both. Once commercial oil production gets underway in 2011, at which point Uganda could be exporting as much 140,000b/d, the shilling may well be the next commodity currency.