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Conflict zones sometimes mean investment opportunities

By Barbara Wall

International Herald Tribune

02.29.2008

Cynthia Steer, chief research strategist at the pensions consulting firm Rogerscasey, has returned to her office in Darien, Connecticut, "galvanized" from a two-week intelligence-gathering trip to sub-Saharan Africa. One of the first calls she received after landing back in the United States was from a client who wanted to know about the political unrest in Kenya. "He asked if it was a good time to invest in Nairobi's stock exchange," she said. "In all honesty, I could not say no."

It is easy to dismiss war zones as no-go areas for investment purposes, but judging by the experiences of many fund managers, the perception of risk is often at odds with reality.

"Given the choice between investing in Africa - conflict or no conflict - and a basket of Western banks, Africa would win every time," Steer said. "As an investor, you know exactly what you are getting in the region: No artifice, just superior growth at inexpensive prices."

According to the International Monetary fund, economic growth in sub-Saharan Africa will top 7 percent in 2008, with oil-rich markets like Nigeria set to grow much faster. An estimated $5 billion of private equity is looking for a home in the region, along with hedge fund money and mutual fund flows.

Jamie Allsopp, the manager of New Star Heart of Africa fund, has made significant investments in Kenya and Nigeria, two markets with which he feels comfortable despite their recent troubles.

"The blowup in Kenya was particularly startling because no one saw it coming," Allsopp said. "The incumbent government had made progress in improving the country's economy and international observers had initially praised the presidential election as generally smooth and fair. But provided negotiations between the two political factions reach a favorable conclusion further progress can be made."

Short-term political unrest is understandably negative for the Kenyan economy and stock market, but the long-term investment potential for this and other sub-Saharan markets, is promising, Allsopp said. "We have not diluted out holdings in Kenya," he said. "In fact we are adding to positions that look cheap."

One of Allsopp's preferred stocks is Access Kenya Group, the only provider of broad band in Nairobi. The company has increased its earnings threefold in the past 12 months and is a favorite pick with Africa analysts.

Although the Nairobi stock market was down 5 percent since the start of the year, many stocks in Kenya have proved remarkably resilient since the crisis erupted in December 2007. Examples include East Africa Breweries and BAT Kenya, which have both risen in value this year. Companies involved in Kenya's tourist trade have fared less well. The share price of Kenya West, the country's main airline, has dropped 30 percent in the past three months.

Many analysts are understandably concerned about the investment outlook in Kenya because it is the economic hub of sub-Saharan Africa. Stuart Culverhouse, a research analyst at the broker Exotix in London, said that he had not seen many international investors pull out or dispose of assets in Kenya but that he had advised clients to delay new buying.

"The macroeconomics outlook for Kenya in the near term, and possibly further out, is challenging," he said, "and I do not believe investors have really factored that in just yet."

If Kenya - which has the region's second-biggest exchange, after South Africa - is out of the running for a while, then other markets, like Nigeria, might benefit. As one of the main exporters of oil in the region, Nigeria, along with its economic landscape, has undergone a transformation in recent years. Money gained from exporting oil has enriched consumers and resulted in increased sales for domestic companies, like brewers, mobile phone providers, banks and food companies.

Dangote Sugar Refinery is a good example of a Nigerian success story, Allsopp said.

"After one of the biggest stock market flotations in Nigeria's history, the share price doubled from its March 2007 launch price, making Dangote the country's largest company by market value," he said. Zambeef Products, the largest meat supplier in Zambia, made similar gains, with its share price rising 150 percent in 2007.

The strength of Nigeria is not just based on its considerable natural resources.

"Successive governments have embraced market orientated reforms and proved good fiscal managers," Culverhouse said. "Inflation is low and the currency has been allowed to appreciate gradually."

His stock picks included Flour Mills of Nigeria, a major diversified conglomerate with interests in flour and consumer goods, as well as cement manufacturing and trading. Culverhouse suggested that the company could benefit from spending on infrastructure in Nigeria and a strong growth outlook for food related goods.

Businesses in which Africa has lagged behind the rest of the world, like banking and telecommunications, can also present interesting opportunities, according to Allsopp.

"Banking stocks have many characteristics that generate shareholder value and higher investor returns, specifically high operating margins," he said. Preferred stocks in the financial sector include three Nigerian companies, First City Monument Bank, Ecobank Transnational and Guaranty Trust Bank.

One lesson that might be useful to investors is Pakistan. While the crisis in Kenya was unfolding, investors were running scared from political turbulence in Pakistan. The assassination of the former prime minister Benazir Bhutto in December sent share prices into a tailspin. Had investors kept faith, they would have been able to claw back some losses. Since the start of the year, the Karachi Stock Exchange has gained 5 percent.

Slim Feriani, managing director of Progressive Asset Management, a fund of funds provider in London, used the turbulence in Pakistan as a buying opportunity.

"We believe the market has priced in a disastrous outlook for Pakistan and Pakistani equities," Feriani said. "But from experience, crisis type situations like these offer exceptional entry points."

If Pakistan and Kenya are considered high risk, then Iraq should be off any sane investor's radar screen. In fact there is only one open-ended fund that invests in the country. The Babylon fund, managed by Björn Englund, who is also managing director of Godvig Asset Management of Luxembourg, has more than 30 percent of its assets in the Iraqi stock market. This portion is expected to grow to around 75 percent by the end of 2008 as more companies enter the index.

The remainder of the fund is invested in international companies that derive most of their profits in Iraqi dinar denominated bonds issued by the Iraqi government and a U.S. dollar Eurobond, one of the few internationally traded Iraqi debt instruments.

Englund is evangelical about the investment prospects in Iraq. Last year, the Babylon fund gained 25 percent: its 2008 performance target is around 20 percent.

There are many reasons Englund believes that Iraq will capture the attention of international investors this year, not least the improved security situation.

"The number of U.S. troops killed in 2007 is at it lowest level since 2004," he said. "Shops are open eight hours a day compared to an average of two hours one year ago and more international companies are setting up business ventures in the region."

But investing in Iraq is no picnic. Corruption is rife and stock market liquidity poor. For these reasons, Englund favors the banking sector, which is relatively well regulated by Iraq standards. Two of his largest holdings are Bank of Baghdad and Commercial Bank of Iraq. Possibly less risky are his holdings in Western companies that do business in Iraq. They include Western Zagros, a spinoff from Western Oil and Petrel Resources, a Canadian company that is domiciled in Dublin and performs technical studies for oil companies.

Englund plans to start another fund this year. He declined to say where the fund would be invested, except to say that it would be in countries that presented challenges similar to those in Iraq.

Perhaps Afghanistan - another country hoping to entice more foreign firms into the region, but daunting hurdles, especially relating to security, must be overcome if that interest is to be maintained and built on.

Ashraf Haidari, political counselor at the Afghan Embassy in Washington, said that the Jan. 14 terrorist attack at the Serena Hotel in Kabul might have shaken the confidence of many in the international community.

Despite the risks, Afghanistan has attracted more than 750 foreign companies from 25 countries, which have collectively invested more than $1.3 billion in many sectors, including telecommunications, banking, services, transportation and logistics, food processing, and construction. There are at least 70 registered U.S. companies with a combined investment of more than $70 million, Haidari said.

"Foreign investment has not only helped revitalize our war-torn economy but also changed Afghans' lives for the better," he said. "Where there were only less than 3,000 land-line telephones in Afghanistan six years ago, there are today more than 3.5 million cellphone users across Afghanistan. Internet cafés have opened in major urban areas, and telecommunication companies have just begun providing home Internet services, connecting Afghan households with the rest of the world for the first time."

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