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Introduction to frontier markets and AfricaJanuary 2011
Page 3
Frontier markets
Africa in perspective
3
Contents
4
Welcome to the Silk Road Frontier regions
o Sub-Saharan Africa – Emergence and a rapidly developing middle classo North Africa – Convergence to its full potentialo Middle East – Diversification benefiting from competitive advantageso Frontier Asia – Rediscovery using its infrastructure and human capital
Increasingly Relevant Regions
5
20.5%
7.9%
1.5%
22.1%
7.8%
3.2%
23.0%
7.8%
1.2%
24.6%
8.7% 8.7%
25.5%
9.4%
13.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Population GDP FDI
Share of world in terms of Population, GDP & FDI
1990
1995
2000
2005
2010e
o FDI flows are not dominated by Chinese investments but are coming from all regionso Portfolio flows are less significant although frontier markets market cap is close to $1
trillion
Source: Silk Invest; UNCTAD; World Bank; IMF; Silk Invest
6
Deep market universe across regions
Source: Bloomberg; African Alliance; MSCI World; Silk Invest
8 9
18 18
28 32
52 53
67 82 87
114 129
298
- 50 100 150 200 250 300 350
Tunisia
Kenya
Bahrain
Oman
Vietnam
Pakistan
Nigeria
Kazakhstan
Morocco
Egypt
Qatar
Kuwait
United Arab Emirates
Saudi Arabia
Market capitalization (USD, Billion)
Close to $1 trillion and is comparable with BRIC countries
7
Frontier markets have historically outperformed
7.1%
8.3%
8.4%
9.1%
11.4%
12.9%
13.1%
14.1%
15.4%
16.3%
18.3%
18.8%
21.5%
31.8%
12.0%
0.5%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Vietnam
Nigeria
Kenya
UAE
Saudi Arabia
Oman
Tunisia
Botswana
Ghana
Mauritius
Pakistan
Kuwait
Qatar
Kazakhstan
Emerging Markets
World
Annualized 10 Year USD returns (%)
Source: Various Sources; Silk Invest; Bloomberg;Note: Data as of January 2012
Equally weighted portfolio in Kuwait, Pakistan and Nigeria delivered investors 4x (15% annualized)
8
Valuation differential is a key return catalyst
10.4 10.1 11.012.5
16.0
19.4
14.2
4.4%4.7%
4.3%
2.6%
2.0%
1.2%
2.2%
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%
0.0
5.0
10.0
15.0
20.0
25.0
Silk African Universe
Silk Arab Universe
Silk Frontiers Universe
US Japan India EM
Estimated Price earnings (PE) and Dividend Yields (DY) multiples
PE '11e
DY '11e
o 2010 has proven that valuations are important and 2011 will probably further focus investor’s attention on this reality
o Frontier portfolios with forward PE multiples of around 11x vs. 14x for EM universeo Sharper contrast when comparing expected dividend yields of 4-5% with global levels
9
The bond party is over but not for frontiers
9.6
5.7
3.9
4.9
5
6.3
0 2 4 6 8 10 12
Silk Debt Universe
EMBI PLUS
EMBI + Africa
EMBI+ Asia
EMBI+Europe
EMBI+LATAM
Expected Yields to maturity (%)
Source: Silk Invest, IMF, DB, CS, JPM and regional research houses
o The low interest rates cycle, which began in the eighties, seems to be finally brokeno EM spreads have significantly tightened over the last few yearso Frontier markets with average YTM of around 10% remain very attractive
Page 10
Frontier markets
Africa in perspective
10
Contents
11
The unknown continent
Source: UNCTAD; IMF: World Bank; Bloomberg; Silk Invest
14.5%
23.2%
3.1%
6.8%
9.1% 9.0%
13.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
World Population
World Surface Global GDP Emerging Markets GDP
Emerging Markets FDI
S&P Emerging Markets Index
Weighting
S&P Frontier Markets
Weighting
Africa Represents (%)
12
Africa’s place in the world
Source: African Alliance; IMF; World Bank; Silk InvestNote: Market Cap as of July 2010; Average FDI in 200-2008; Population and GDP numbers as of 2008
2% 4%
16%
4%
25%
3% 2%
17%
5%
28%
4% 6%
20%
11%
57%
0%
10%
20%
30%
40%
50%
60%
70%
Share of World Market Cap
Share of Average World FDI
Share of World Population
Share of World GDP, PPP
Share of World Average GDP per
capita, PPP
Share of World
Africa India China
Twice the level of FDI of India
13
Africa’s growth engines
Source: UNCTAD; IMF: World Bank; Bloomberg; Silk Invest
2.5% 2.8%4.9%
7.5%
24.8%
32.0%
43.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Population Labor productivity
GDP per capita
Total GDP Stock price of top 40 African
firms
FDI Mobile Phone Subscribers
10 Year annualized growth (%)
•More people•More productive•Spending more•Highly entrepreneurial• Increasingly connected
14
Forget commodities…Profit from the consumer
Source: World Bank; IMF; Silk Invest
194 243 272 318 322 312 293 267 230 181
264 291 340
379 456 545 654 775 911 1,051
35 35
43 46
63 85
105 129
152 185
-
200
400
600
800
1,000
1,200
1,400
1,600
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
African middle class on the rise (Population by income group)
Below Poverty Line Above Poverty Line & Below 5k GDP per capita Above 5K GDP per capita
•2010: 760 million above poverty line•2025: 1.23 billion above poverty line•475 million new consumers in 15 Years
15
A wealthier and urbanizing consumer
Source: Mc Kinsey; IMF; UN; World Bank; Silk Invest
1.9
2.4
3.1
0
0.5
1
1.5
2
2.5
3
3.5
1999 2009 2014
GDP PPP per Capita (xK, USD)
3040 45
51
73
7060 55
49
27
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
India Africa 2010 China Africa 2020 Europe
Breakdown of Population (%)
Urban Rural
Number of cities with 1 million + people
48 50 109 66 52
16
Great opportunity as perception is not reality
Source: World Bank; WEF; IMF; Silk InvestNote: 1 is bad and 10 is extremely strong
3.9
7.06.7
5.4
3.3
6.6
5.9
5.0
2.8
6.6
7.3
5.6
2.7
6.3
5.4
4.3
2.5
6.3
5.6 5.9
2.2
5.9
6.6
3.9
2.2
4.6
5.3
3.9 3.6
6.1 6.7
5.6
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Corruption Protection of minority shareholders’ interests
Strength of auditing and reporting standards
Judicial Independence
Institutional Strength Ratings
Ghana Morocco Egypt Ethiopia Nigeria Kenya Russia China
• All Silk selected countries rank better than Russia
Page 1717
Low leveraged economies
Source: IMF 2007 dataNote: Debt is total of public and private debt; Reserves are IFS Reserves ex. Gold
146%
180%
216% 210%
60% 58%
8% 15%12%2% 0%
22%40%
12%22% 26%
0%
50%
100%
150%
200%
250%
World EU US Japan Asia Latam Middle East Africa
Financial reserves and total debt as % of GDP (%)
Debt as % of GDP Reserves as % of GDP
18
Key Countries
Source: African Alliance; IMF; World Bank; Silk InvestNote: Market Cap as of July 2010; Average FDI in 200-2008; Population and GDP numbers as of 2008
CountryMarket
cap (x USD Billion)
% of Africa’s average
GDP, PPP (x USD Billion)
% of Africa’s
total
FDI (x USD Billion)
% of Africa’s
total
Population (x million)
% of Africa’s
total
GDP per capita, PPP
(x USD)
% of Africa’s average
Angola 0% 97 3% 13.1 22% 18 2% 5,820 220%
Botswana 4.4 1% 24 1% 0.2 0% 2 0% 13,574 513%
Egypt 46.8 6% 409 15% 6.7 11% 80 8% 5,425 205%
Ethiopia 0% 65 2% 0.1 0% 85 8% 869 33%
Ghana 6.8 1% 32 1% 1.7 3% 25 2% 1,463 55%
Kenya 15.1 2% 56 2% 0.1 0% 41 4% 1,551 59%
Mauritius 5 1% 14 1% 0.3 0% 1 0% 12,356 467%
Morocco 65.9 8% 126 5% 1.3 2% 32 3% 4,263 161%
Nigeria 45.8 6% 293 11% 5.9 10% 158 15% 2,099 79%
South Africa 603 74% 455 16% 5.7 10% 48 5% 10,116 382%
Tunisia 11.8 1% 76 3% 1.7 3% 11 1% 7,956 300%
Silk Invest countries 805 98% 1,646 59% 36.8 63% 501 48% 3,288 124%
Total Africa 819 2,786 58.56 1,052 2,648
Nigeria – Dangote Cement
o Largest cement company in Africa. Market capitalisation of N1.86bn ($13 billion).
o Jewel in Alhaji Aliko Dangote’s $20bn commercial empire.
o Merger between Benue Cement and Dangote Cement. Combined 70% of Nigerian market.
o Also in South Africa, Zambia, Senegal, Ethiopia and Sierra Leone.
o Plans to raise Nigerian capacity fivefold by 2015, gaining sales from imports and expanding market.
o 2011 PE – 9.2xo 2011 Div Yield – 6.2%
19
First purchased as BCC 4th May 2009 +325%
0
10
20
30
40
50
60
70
80
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Historical Price in Local Currency
Kenya – Equity Bank
o With over 5.7 million accounts, accounting for over 57% of all bank accounts in Kenya, Equity Bank is the largest bank in the region in terms of customer base
o It operates also in Uganda and Southern Sudan.
o Micro-lender with rural distribution and technology edge (MPESA).
o Kenyan remittances tripled in 2010 to $ 1.9 bn.
o 2010 EPS up 52%o 2011 Dividend Yield - 3.1%o 2011 PE - 10.6
20
First purchased 24h April 2009 +105%
0
5
10
15
20
25
30
35
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Historical Price in Local Currency
Private firms have limited access to capital
1%
3%
8%
9%
11%
11%
14%
20%
UK
Morocco
Egypt
South Africa
Ethiopia
Ghana
Nigeria
Kenya
0% 10% 20% 30%
Interest Rate Spread (%)
Source: World bank; Silk InvestNote: Interest Rate spread is defined as lending rate minus deposit rate
212%
96%
78%
172%
38%
33%
27%
40%
UK
Morocco
Egypt
South Africa
Ethiopia
Ghana
Nigeria
Kenya
0% 100% 200% 300%
Credit provided by banks (% of GDP)
21
Page 2222
Food industry is growing and very profitable
Source: Silk Invest
21.1
23.8
19.8
0
5
10
15
20
25
Egypt South Africa Rest of Africa
Average 4yr annual Net Earnings growth of listed food companies (%)
11.3 12.213.7
40.3
25.6
34.3
0
5
10
15
20
25
30
35
40
45
Egypt South Africa Rest of Africa
EBITDA Margin of listed companies
Average Top
o Formalization of African food sector:o Retail distribution: Retail sector in
Africa is rapidly growing from a low base but currently accounts for less than 20% of market
o Branded products: Rapid transformation from non-packaged non-branded to packaged and branded food products
o Import substitution: Local branded products are replacing more expensive imported products
o New products: Expanding middle class demanding new product categories (e.g. Baby food, and different types and flavours of yoghurts and cheeses)
o Growth of the Supermarket Trend:Local supermarket chains in collaboration with foreign partners are increasingly making their way into Africa.
23
Long term changing consumer patterns
17
3835
57
48
64
36
14
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sub-Saharan Africa
North Africa South Africa
Breakdown of Food sales channels
Supermarkets Small grocery shops Traditional Markets
Source: Various sources; Silk InvestNote: Estimate as of 2009
Meat Processing
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
- 10 20 30 40 50 60
5YR
CA
GR
futu
re g
row
th
By Capita Consumption
Annual Meat Consumption (KG)
Morocco
Egypt
Nigeria
South Africa
24
Beverages
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0 10 20 30 40 50 60 70
5YR
CA
GR
futu
re g
row
th
By Capita Consumption
Soft Drink Consumption (L)
Angola
Cameroon
Nigeria
South Africa
Kenya
25
Conclusions
26
o The world is turning upside down with a major shift of economic power to the regions on the original Silk trade routes
o The main investment themes throughout Africa are better infrastructure, the upcoming consumer and the new entrepreneurs
o Sub-Saharan Africa is coming from a low base but has shown tremendous changes in the last few years
o North Africa is converging to the level of middle class countries and is following the route of countries like Turkey
o Capital markets in Africa are ready for international investors and represent a unique low valuation window of opportunity
o Food industry is among the most attractive sectors in Africa and is expected to grow by 20% annually in the coming years
27
Thank you
Dr. Heinz HockmannChairman
Murray WhiteDirector
Hajar MouatassimDirector
Zin BekkaliCEO
Daniel BrobyCIO
Chris MullerInvestment Director
Hesham SaadInvestment Director
Funmi AkinluyiInvestment Director
Youssef LahlouPortfolio Manager
Abdeltif StitouChief Operating Officer
SUPERVISORY & ADVISORY COMMITTEE
EXECUTIVEMANAGEMENT
EQUITIES & FIXED INCOME TEAM
BUSINESS DEVELOPMENT & OPERATIONS
Baldwin BergesMD Business Dev.
Waseem KhanMD Private Equity
John BatesDirector FI
Gohou DanonQuant Analyst
Mohamed AbdeenPortfolio Manager
Gary RichardsonMarketing Manager
Patrick LandiInvestment Director
PRIVATE EQUITYTEAM
Jamil AkhundovInvestment Director
Nigel BannermanInvestment Director
Laolu AlabiInvestment Analyst
Marc FossExecutive Director
Ari-Pekka HildenDirector
Alexandre CantacuzèneDirector
Bridie LaplaceInvestment Analyst
Ryan Lalloesingh Trading Manager
Alexandra FlechsigBusiness Manager
Thank you
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28
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Disclaimer
Silk Invest Limited is regulated by the Financial Services Authority.
All information herein must be treated as confidential or legally privileged information that is intended for theaddressee(s) only.You are advised to exercise caution in relation to its contents. If you are in any doubt about any of the contents ofthe document, you should obtain independent professional advice.This document does not constitute an offer forsale of any security or fund mentioned herein and is for information purposes only on Silk Invest funds.Silk Invest has a number of funds (“funds”) on its platform. Information on these funds should be read in conjunctionwith the Offering Memorandum or Prospectuses.Silk Invest funds may invests in speculative investments and involve a high degree of riskAn investor could lose all or a substantial portion of his/her investments in frontier marketsAn investment in the frontier markets is not suitable for all investors.Some Silk Invest funds may be leveraged and performance could be volatile.Silk Invest funds may execute a substantial portion of trades on poorly regulated emerging market stock exchangesas well as OTC products.Silk Invest funds may be illiquid and there may be significant restrictions on transferring interests in such the funds.Silk Invest’s fees are higher than fees for mutual funds as they include a performance incentive.The contents of this document have been approved by Silk Invest’s compliance officer.This summary is not a complete list of the risks and other important disclosures involved in investing in any Silk Investfund, details of which can be found in the Offering Memorandum or prospectus.
29