Frontier Markets: Now’s Your Chance To Bank A Fortune

From Tbilisi and Vladivostok to Rio and the gold souks of Dubai, opportunities abound in the world. And just because you’re not 100% sure how to pronounce the names of some of these places doesn’t mean you should avoid looking there for profits in investing.

I write as an investor traveling the world to make valuable new contacts and friends. My “special situations” letters abound in reports from the people I’ve met, who continue to update me with boots-on-the-ground analysis. Perhaps you’ll become one of them…

In the meantime, I want to share some of my latest and favorite opportunities I’ve uncovered in the past year of travel.

As you know, great disparities and differences exist in the world. None perhaps is a bigger trend in our time than the closing of the big gap between the Eastern and Western worlds.

You see, the Industrial Revolution vaulted the United States and Europe well ahead of anyone else. Traditionally wealthy economies of the Middle East, China and India were left far behind. But that gap is closing fast.

The apex was in the 1950s, when the Western world (ex-Japan) represented 90% of the world’s manufacturing output — as late as 1953. America’s economy alone made up nearly half of that output.

I consider the narrowing of this gap to be the single most important long-term investment theme of the 21st century.

I call it “the world right side up.” If you look over the history of our planet, Western dominance is a relatively recent affair. So the shift back is perhaps normal. The distinction between “emerging markets” and “developed markets” is disappearing.

Now emerging markets make up about half of the global economy. Chief among them are the BRICs (Brazil, Russia, India and China), but I see other regions that offer even better promise to early investors.

In these pages, I’ll focus on where these markets have been and where they’re heading. Today’s emerging markets are large and liquid. Let’s get exploring…

Three Frontier Markets You Can’t Afford to Overlook

There are many exciting frontier markets for investors who tire of the declining fortunes of Western markets. Many of them happen to be in Africa. There is a safe way to get exposure to these markets, too.

I keep seeing all kinds of fascinating tidbits that show Africa is a hopping bed of opportunity.

As I type the region is still enjoying a record amount of investment in mining. There are large coal deposits in Mozambique, rich veins of iron ore in Guinea and plentiful copper in the Congo. That may not surprise you, but Africa is also home to three-quarters of all global land deals. Sudan, Zimbabwe and Tanzania have granted big swathes of land to investors to boost output of soybeans, sugar cane, oranges, dates, peanuts and many other crops. Tax incentives and special economic zones encourage manufacturing from Nigeria to Zambia.

Another clue comes from the hotel industry. I have a soft spot for hotels. I always have. They often tell a story about a place. Hoteliers, too, are like bird dogs. They point to areas where change is happening. When room rates rise, hotels respond with new hotels. In Africa, the pipeline for new rooms is booming. Most of that increase is in the south, in sub-Saharan Africa.

The number of consumers in Africa is on the rise. By some estimates, there are already 75 million households in Africa that can be considered middle class. That’s five times what India has. And nearly 60% of them are in the sub-Sahara. The challenge is they are spread out over a large area, in many different markets. But still, there are enough pockets for investors to work with.

As a generalization, Africa is resource rich, but capital poor. These are two ingredients that make for high returns for investors. The continent is a target-rich environment. Single-digit price-earnings ratios are common, as are double-digit yields.

Now let’s break it down to regions.

South Africa is a great staging area to get access to the broader sub-Saharan African market. There are lots of opportunities of different shades in, for instance, Namibia and Angola (offshore oil and gas), Zambia (copper), Mozambique (agriculture) and even Zimbabwe — just as a partial list of highlights.

For clues, I visited Imara, an investment bank and asset manager with an expertise in sub-Saharan Africa. We met at Nelson Mandela Square in Johannesburg over lunch at the renowned Butcher Shop & Grill. There wasn’t a cloud in the sky, and we ate out in a covered veranda next to the square.

“Imara” is a Swahili word meaning “strong,” and Imara’s emblem is an African scarab beetle, which is capable of carrying 800 times its body weight. The Imara story is rooted in Africa going back to 1938.

I admit, even globe-trotting I was surprised to hear investment managers and directors at Imara talking so enthusiastically about Zimbabwe — or Zim, as they called it.

As for Zim, it may seem crazy to invest in a country run by Robert Mugabe, an aging Marxist thug whose policies have brought the country to ruin. But the market is extremely cheap. The theory goes that the worst has passed and owning a basket of Zim stocks is a ticket to future wealth many times what you put in today.

Zim’s stock market is not among the biggest in Africa, but it has a depth and breadth of securities. Its first stock market opened in 1896 in Bulawayo to raise money for gold miners. But today, the market has 81 securities that do everything from manufacturing to pharma and all manner of stuff in between. In recent years a majority of stocks reported earnings growth of 40%. Imara’s recent forecasts was for 20% growth going forward. Yet many stocks trade for low multiples of earnings, some as little as 2 or 3 times!

Zim, for all its problems, has a generous reserve of natural resources. In particular, it produces chrome, coal, diamonds, gold and platinum. It also enjoys a high degree of literacy among its people and, according to Imara, a dynamic private sector.

While I traveled in South Africa, though, a broader theme emerged. I think it is the most compelling big-picture theme on the continent. Perhaps it is best to illustrate with an anecdote.

A billionaire investor named Anand Burman controls a company called Dabur. This company makes consumer goods such as packaged honey and hair oil as well as medicines. It began in India, but is expanding in Africa.

This is significant because India is a huge market opportunity itself. Why go to Africa? As CEO Sunil Duggal put it: “The African market is the epicenter of our growth prospects for the future. The upsides in some of these markets are as much, if not bigger, than India.”

It’s a telling comment. At least the minds behind Dabur have concluded they can sell a lot of honey and hair oil to African consumers. As to just how many consumers, there are many fancy guesses with numbers and assumptions that hide their unreliability. But the best way to see the African consumer in action is to look at the little stories. For example, one that sticks out in my mind is from Vijay Mahajan’s recent book Africa Rising.

He writes about a man and his family living in Nairobi on $400 a month. The family hardly sounds like much of a consumer group to get all worked up about, yet they buy food at a local supermarket, have a television set and a radio and several cell phones. The family manages to pay for private education for its three daughters. They took out a small loan to pay for solar panels that provide electricity to their three-bedroom home, which they own.

So you see, in Africa, your perspective needs serious recalibrating. It is easy to write off the continent as a basket case. But I think that would be a mistake. Many of the trends happening in other emerging markets are also happening in Africa. More people moving to cities. More people joining in the ranks of global consumers.

I saw this with my own eyes in South Africa. I visited a Fresh Stop convenience store at a Caltex gas station. The Fresh Stop was like a mini-grocery story offering fresh fruits and vegetables. It was clean and well attended. It was also busy. There are many more examples.

Anecdotal evidence paints a picture that bloodless statistics fail to capture. If you need further proof, dwell on the African operations of major companies. You will find them growing and very profitable. SABMiller, the giant brewer, for instance, recently reported brisk sales of beer in Africa — 20%-plus growth in some markets. And consumption is nowhere near saturation levels.

Or turning again to Imara, a report recently called sub-Saharan Africa “the last cement frontier.” It is a market in which prices are 200% above those in other emerging markets. Demand is huge, yet “Africa’s cement companies are cheap,” Imara opines.

No surprise, too, that China is all over Africa. Africa supplies the Chinese with much-needed raw materials, including oil. All that money sloshing around means more Africans using banks, grocery stores, cell phones and the like.

How to play such a cornucopia of opportunities? As you might expect, I have a favorite. But this message is already long enough, tune in tomorrow for a continuation.


Chris Mayer
Original article posted on Daily Resource Hunter

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Chris Mayer

Chris Mayer learned the art of valuing companies the hard way — clocking a decade as a corporate banker while also earning his MBA. He never lost money on a single deal. In 2004, he founded Capital & Crisis, making his one-of-a-kind research available to the general public. His second letter, Mayer’s Special...

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