Raw Minerals & Energy Proven reserves: Oil: Natural Gas: Thousand million World Trillion cubic World barrels Rank metres Rank ….The Frontier is Rich Africa Algeria 12.2 17 4.5 10 Africa Angola 13.5 15 Africa Chad 0.9 42 World World Africa Gabon 3.2 31 Resource Rank Country Resource Rank Country Africa Libya 43.7 8 1.5 22 Barite 6 Algeria Lead 1 Algeria Africa Nigeria 36.2 10 5.2 8 Africa Rep. of Congo 1.9 35 Barite 14 Bulgaria Lead 4 Macedonia Africa Sudan 6.7 21 Barite 18 Vietnam Lead 7 Namibia Africa Tunisia 0.6 46 Bauxite 1 Guyana Lead 12 Zambia Asia Azerbaijan 7.0 20 1.2 24 Bauxite 8 Guyana Lead 14 Serbia Asia Bangladesh 0.4 39 Bauxite 11 Kazakhstan Lead 17 Turnisa Asia Kazakhstan 39.8 9 1.8 18 Bismuth 8 Kazakhstan Molybdenum 6 Armenia Asia Pakistan 0.9 28 Boron 9 Kazakhstan Molybdenum 8 Kazakhstan Asia Turkmenistan 0.6 47 7.9 4 Asia Uzbekistan 0.6 48 1.6 21 Cadmium 6 Kazakhstan Molybdenum 13 Mongolia Asia Vietnam 4.7 25 0.6 31 Cesium 2 Namibia Nickel 15 Botswana Eastern Eur Romania 0.5 49 0.6 30 Cesium 3 Zimbabwe Nickel 17 Zimbabwe Eastern Eur Ukraine 0.9 27 Chromite 2 Kazakhstan Niobium 7 Namibia Latin Am Bolivia 0.7 29 Cobalt 4 Zambia Niobium 8 Nigeria Latin Am Colombia 1.4 38 0.1 48 Copper 2 Zambia Niobium 11 Uganda Latin Am Ecuador 3.8 28 Latin Am Trinidad & Tobago 0.8 44 0.5 35 Copper 5 Namibia Phosphate 15 Senegal MidEast Bahrain 0.1 50 Copper 7 Uganda Rhenium 2 Armenia MidEast Iran 137.6 2 29.6 2 Copper 8 Botswana Soda 6 Uganda MidEast Iraq 115.0 3 3.2 12 Copper 9 Zimbabwe Soda 2 Botswana MidEast Kuwait 101.5 4 1.8 19 Diamonds 2 Botswana Soda 7 Kenya MidEast Oman 5.6 23 1.0 26 Diatomite 12 Romania Vermiculite 6 Zimbabwe MidEast Qatar 27.3 13 25.5 3 Fluorspar 5 Mongolia Zinc 1 Algeria MidEast Saudi Arabia 264.1 1 7.6 5 MidEast Syria 2.5 34 0.3 45 Fluorspar 8 Namibia Zinc 3 Namibia MidEast United Arab Emirates 97.8 6 6.4 7 Fluorspar 9 Kenya Zinc 5 Zambia MidEast Yemen 2.7 32 0.5 34 Ilmenite 12 Vietnam Source: British Petroleum, 2009 47
Netherlands Portugal France Ger African Opportunity Spain It E. Europe U.S. India China Mongolia U.K. Japan 48
Deposits & Loans versus GDP 1000% Netherlands Ireland Singapore Banking Opportunity HK Loans % GDP Belgium EAFE Ukraine 100% Panama Lebanon Russia Zambia Pakistan Mexico Uganda Malaw i 10% 10% 100% 1000% Deposits % GDP Bank Accounts per Adult Source: Consultative Group to Assist the Poor, World Bank, 2009 4.0 Austria Ukraine Malaysia Belgium 3.5 3.0 Eatonia Bank Acouts/Adult 2.5 US Mongolia 2.0 1.5 Slovenia India 1.0 Bangladesh 0.5 Malaw i Uraguay Pakistan Paraguay 0.0 $100 $1,000 $10,000 $100,000 GDP / Capita Source: Consultative Group to Assist the Poor, World Bank, 2009 49
Education Strathmore University, Nairobi 50
Technology Source: Human Security Centre, UBC 51
Entrepreneurship 52
Middle Class - Bangladesh Bashundara City Mall, Dhaka, Bangladesh 53
Middle Class 54
Stock Opportunities Great Businesses – Simple operations – Growth potential – Sidecars and monopolies Strong Management – Experienced – English speaking – Trained abroad Good Information – Annual Reports (Big 4 Audits) – Investor Relations & Websites 55
Stock Opportunities PE ROE Yield Growth Investment Co. 6.1x 24% 0.0% 25% Bank 3.9x 25% 0.0% 20% Conglomerate 4.0x 19% 2.6% 20% Petroleum Dist 7.2x 25% 4.3% 30% Dairy 9.8x 22% 0.0% 30% Tobacco 5.0x 37% 12.3% 20% 56
Stock Example: Commercial Bank of Zimbabwe • Largest bank in the country with 30% market share • Exposure to growing economy and return of consumption • Diversification in Banking, Asset Management, Insurance • 2011e: PE 3.9X, ROE 25%, Earn. Growth 65%, PEG 0.2X • Auditor: KPMG 57
Stock Example: Qatar Fuel, Qatar • Largest LNG and refined petroleum distributor in country • Qatar is #1 LNG exporter in the world • Strong Parent (40% government owned) • 2011e: P/E 7.2X, ROE 25%, Yield 4.3%, PEG 0.25X • Auditor: Deloitte & Touche 58
Stock Example: Dairibord, Zimbabwe • Privatized 1994, largest dairy producer in Zimbabwe • Milk Consumption: Zimbabwe 8 liters/capita vs 25 in 1990, 20 in Uganda, 92 in U.K. • 65% share in milk, 50% share in ice cream, 20% share in beverages • Cow milk yields fell from 21 liters/day to 8, now recovering • Spare capacity being reopened • 20% of sales through 500 bicycle vendors, adding 300 more • 2011e: PE 9.8x, Price/Book 1.5x, ROE 22%, Earnings Growth 25%+ • Auditor: Ernst & Young 59
Botswana Stock Exchange 60
Frontier Returns have been good S&P 500 1000 EAFE EM Frontier S&P + EAFE Index (7/82 = 100) Source: MSCI /S&P Mar 2011 10 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 61
Frontier Returns have been good Index Returns 1996 - 2010 100% S&P 500 Index MSCI EAFE MSCI Emerging Mkts S&P/IFC Frontier Composite 80% 60% 40% 20% 0% -20% -40% -60% Source: S&P/IFC, FrontierMcapRtnsVol0910, 2010 -80% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 62
Frontier Market Valuation is Attractive 63
Frontier Markets are attractive on Price/Book 64
Frontier Markets are attractive on ROE 65
Frontier volatility is lower than Emerging Markets 66
Correlations are low among frontier countries Correlations with: Bangladesh Botswana The average correlation of 20 Frontier Markets Bangladesh 1.00 0.16 with Bangladesh is 0.27 Botswana 0.16 1.00 Bulgaria 0.23 0.48 The average correlation of 20 Frontier Markets Cote d'Ivoire 0.33 0.36 Croatia 0.29 0.54 with Botswana is 0.38 Ecuador (0.10) 0.17 Estonia 0.30 0.39 Ghana 0.04 (0.05) Jamaica 0.04 0.31 Kenya 0.57 0.29 Latvia 0.17 0.41 Lebanon 0.45 0.32 Lithuania 0.16 0.44 Mauritius 0.38 0.52 Namibia 0.22 0.44 Romania 0.11 0.51 Slovak Repub 0.17 0.42 Slovenia 0.30 0.52 Trin. & Tobago 0.14 0.00 Tunisia 0.40 0.51 Ukraine 0.32 0.33 Average (ex 1.00) 0.27 0.38 Source: S&P 36 mos Dec 2010 67
Correlation is low 68
Correlation is low 69
Heritage Foundation – Economic Freedom Ranks BUSINESS FREEDOM • Starting a business— procedures (number), time (days), cost (% of income per capita), minimum capital (% of income per capita) • Obtaining a license— procedures (number), time (days), cost (% of income per capita) • Closing a business— time (years), cost (% of estate), recovery rate (cents on the dollar) TRADE FREEDOM • The trade -weighted average tariff rate • Non -tariff barriers: quantity restrictions, price restrictions, regulatory restrictions, investment restrictions, customs restrictions, and direct government intervention FISCAL FREEDOM • The top tax rate on individual income and on corporate income FINANCIAL FREEDOM • Central Bank Independence • Total tax revenue as a percentage of GDP • Freedom of credit allocation GOVERNMENT SIZE • Contract enforcement • Government spending % of GDP • Presence of private financial institutions MONETARY FREEDOM • Foreign financial institutions not restricted • The weighted average inflation rate for the most recent three years • Price controls PROPERTY RIGHTS • Private property guaranteed by the government INVESTMENT FREEDOM • There is no corruption or expropriation • Restrictions in sectors related to national security or real estate • The court system enforces contracts efficiently and quickly. • Expropriation risk • The justice system punishes those who unlawfully confiscate private • Access to foreign exchange • Restrictions on transfers or capital transactions property CORRUPTION • Transparency International‘s Corruption Perceptions Index (CPI) LABOR FREEDOM • Ratio of minimum wage to the average value added per worker • Hindrance to hiring additional workers • Rigidity of hours • Difficulty of firing redundant employees • Legally mandated notice period 70
Economic Freedom – The Heritage Foundation 0 30 60 90 0 30 60 90 Mozambique Mexico 0 30 60 90 Nigeria UAE Mali Hong Kong Costa Rica Brazil Singapore Hungary Philippines Malaysia Australia Indonesia Saudi Ar New Zealand Macedonia Malawi Switzerland Latvia Senegal Canada Jamaica Moldova Ireland Trinidad Cote d'Ivoire Denmark Kuwait Pakistan United States Panama India Bahrain Bulgaria Yemen Chile Romania Bangladesh Mauritius Thailand Algeria Slovenia Luxembourg Mauritania France Estonia Haiti Turkey Netherlands China Portugal United Kingdom Cameroon S. Africa Finland Argentina Namibia Cyprus Rwanda Guinea Japan Montenegro Vietnam Sweden Paraguay Laos Austria Kazakhstan Syria Germany Guatemala Ethiopia Lithuania Uganda Russia Taiwan Croatia Nepal Greece Qatar Bolivia Italy Georgia Guyana Lebanon Czech Republic Belarus Dom Rep Norway Lesotho Azerbaijan Belgium Ecuador Zambia Spain Morocco Liberia Uruguay Mongolia Angola South Korea Ghana Uzbekistan Oman Egypt Ukraine Slovakia Nicaragua Turkmenstn Jordan Tunisia Iran Serbia Botswana Libya 2011 (Frontier Cambodia Peru Burma Markets in Dark) Bhutan Barbados Venezuela Bosnia Israel Eritrea Kenya Iceland Cuba Sri Lanka Colombia 71 Zimbabwe Tanzania North Korea
Inefficiency = Opportunity • ―Our retail investors are just trying to follow the others, keen to know what the so called ‗gamblers‘ are going to buy: – ‗I heard this share's price will jump, because some gambler is going to buy it ‘ • In our market, we have some stocks like Apex foods, Apex tannery, Apex footwear, Apex Spinning, Apex weaving etc. These companies are doing different kinds of business. Some are involved in textiles, some in foods and some in footwear. – If there is a good news for say… Apex footwear - that is involved in footwear business, all companies that name begin with Apex will start rising . • They are acting as a group even though the business is different and the owners are different for some companies.‖ • We have different multinational companies that are involved in different business that are totally different from other multinational‘s business. – For example, Bata is multinational company involved in footwear business where British American Tobacco involved in tobacco business that has no relation with Bata. • When the multinationals start rising, all multinationals start rising together • Investors have a general preference of stock dividend over cash dividend. They always like to have stock dividend. If a cash dividend paying company declares stock dividend, the price will immediately start jumping. • Low Price/Share or Price/Par Value 72
Inefficiency = Opportunity – Few Chartered Financial Analysts – Locals more Important than Foreign Investors • Bangladesh: 3% per Equity Partners Limited • Kenya: 10% per Kestrel Capital • Malawi: 40% per Trust Securities • Vietnam: 40% per Ho Chi Minh Stock Exchange 73
Local Behavior in Bangladesh 74
Optimism – The Pew Survey Money does buy Happiness…. Life Satisfaction versus Income . 80 Series1 70 Developed USA % Satisfaction 7-10 Emerging 60 Frontier 50 Log. (Series1) 40 30 20 10 Source: Pew Opinion Survey 2007, Ondine Frontier Countries0706 0 $100 $1,000 $10,000 $100,000 GDP/Capita USD 75
Optimism – The Pew Survey But Optimism is rare in the Richest Places Optimism versus Income 100 Mali Senegal 90 Bangladesh India 80 Kenya 70 South Africa % Optimistic 60 USA 50 Pakistan 40 30 20 10 Source: Pew Opinion Survey 2007 0 $100 $1,000 $10,000 $100,000 GDP / Capita 76
Optimism – The Pew Survey The Optimists are in the Poorer Countries "Next Generation Better Off" versus Income . 100 90 China Bangladesh 80 70 % Optimistic 60 50 40 USA 30 Series1 Developed 20 Emerging Frontier Italy Japan 10 Log. (Series1) Source: Pew Opinion Survey 2007 0 $100 $1,000 $10,000 $100,000 GDP / Capita 77
Optimism: Determination 78
Optimism: Determination 79
Optimism: Determination 80
Optimism: Determination 81
Optimism: Determination 82
Optimism: Determination 83
Hope for the Future 84
Conclusion: Reasons for optimism 85
Correlation is low with Emerging Markets 86
Results 87
Results 88
Back To The Future
Back To The Future
Back To The Future
What‘s Emerging in Emerging Markets 92
Frontier market growth prospects Key fund exposures Source: World Bank ,as at August 2011, in USD. 93 93
Valuations and profitability Frontier Markets attractively valued relative to Emerging Markets Source: Russell Investments, Factset as at 15/08/2011. Analysis limited to companies with a minimum ROE of 10%. Frontier as represented by the Russell Frontier Markets Index and Emerging as represented by the Russell Emerging Markets Index 94
Liquidity Review 5/2/2008 3/6/2009 10/28/2011 % chg 3/09-10/11 Africa $20.0 $5.4 $20.4 280% E Europe $32.8 $6.5 $8.2 26% Latin America $19.9 $11.3 $7.0 -38% Asia $61.0 $35.4 $44.9 27% Total $133.7 $58.5 $80.5 38% Top Quartile $20.1 * Est Firm Capacity ex-GCC $201 * Firm Capacity estimate based on holding 10 days volume 95
Child Mortality – http://www.gapminder.org/downloads/ 96
Emerging and Frontier Market Capitalization Benefits to being Early Mover 4,000,000 3,500,000 3,000,000 US$ Millions 2,500,000 2,000,000 1,500,000 $111 billion* – Frontier Markets 1,000,000 500,000 Emerging Markets - 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 * Represents free float market capitalization as of June 1st 2009. Source: MSCI, BGI. Source: MSCI, BGI, Lockheed - 2010 97 97
Stock Example: Presscorp, Malawi • Diversified conglomerate including Coca Cola and Carlsberg franchises • Growing economy and rising consumer in Malawi • Strong management (CEO was Central Bank Governor with MIT PhD) • 2011e: P/E 3.3X, P/BV 0.6X, Earn. Growth 22%, PEG 0.2X • Auditor: KPMG 98
Our Investment Process: Bottom-up Driven Discipline Inputs Objective Country Analysis Country Visits Limit universe to investable markets Economics – Growth, Inflation, Currency, Population Politics – Stability, Regulation, Taxation, Trade Market – Liquidity, Transparency, Governance Security Analysis Company Visits Earnings Modeling Conference Calls PB-ROE Modeling Analyst Contacts PEG Ratios Financial Statements Quarterly Comparisons & Projections Company and Industry Reports Company Checklists Database Analysis Buy/Sell Ideas Portfolio Construction Stocks we like include: Buy: 40-50 stocks in 20 countries - Sidecars (a strong strategic partner) Sell: When fundamentals deteriorate or a better idea is found - Franchises (profitable niches) Limit: Stocks to 10% at cost, cut back at - Monopolies 15%, Country limit 25% Trade: Patiently Horizon: Long (turnover target < 33%) 99
100 Peraliya, Sri Lanka
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