Reconnaissance: Strategy Notes
Codexa Capital
By Douglas Clark Johnson
July 5, 2012
Investors focused on emerging markets may be well positioned to benefit from a "barbell" strategy, favoring sukuk and Southeast Asian equities. While in Afghanistan, we’re more inclined to tilt toward optimism than despair in the wake of military right-sizing. Both India and some Middle East countries are set to be active there. We offer other comments on high dividend yields in GCC stock markets and emerging trends in Ghana’s timber industry.
Islamic Barbell: Responding to the Summer Market Swoon
We’re now proclaiming bad news as good news a bit too often. The front-page Financial Times’ headline, “China purchasing managers index data spur stimulus hopes” suggests how desperate markets may be to grab any crumb of expectation in timely circulation.
Investors based in Bahrain or Kuala Lumpur may have opportunities that aren’t obvious to observers elsewhere. We’d hold large positions in so-called short-duration assets, complemented by sizable positions in long-duration assets. We largely abandon the middle ground.
Liquidity-and-income. Keep an eye on the sukuk market. Issuance growth may exceed 50% this year as investors reach for yield. Key market supports include a growing attraction to Islamic instruments and declining credit ratings in the major markets. There is also room for stocks offering income advantage.
Buy-and-hold. There is a touch of IPO enthusiasm in Malaysia; we question if it will live beyond the next election cycle. But a long-duration strategy here and elsewhere in the region, including Indonesia, seems prudent, given a durable economic backdrop.
The Northern Hemisphere’s summer market swoon is underway. There is room for some optimism in Europe, but fiscal apathy prevails in the US. Even if China does deliver materially on that stimulus, we doubt it’ll be a home run for global markets.
Afghanistan: Beyond NATO
Keep an eye on Afghanistan. It’s now a story at best for the risk-tolerant direct investor. Progressive economic news is limited. We expect that will begin to change in tandem with a reduced military presence. We see at least two unconventional trends emerging:
Foreign policy. India will become the dominant foreign influence on Afghanistan, with de facto support from the US. The diplomatic corps from Delhi is likely to be an advance team for Indian commercial interests.
Direct investment. Look for greater flows from the GCC in support of Afghan opportunities. Some Arab companies see constrained potential for Gulf-based expansion. And Kabul is just a two-to-three- hour commercial flight from the GCC.
Afghanistan needs this sort of engagement, strengthening the economy and the reform process. Neighboring Iran, unfortunately, is a counterweight to these developments because of the impact of sanctions on its sizeable economy. On a net basis, however, we’re more inclined to tilt toward optimism in our Afghan outlook than despair.
GCC: Income Advantage
An important feature of GCC stock markets is that they offer relatively high dividend yields these days. The notion defies standard logic. Convention wisdom holds that emerging stock markets offer low dividend yields because companies retain their profits to invest in growth, rather than pay out earnings in the form of income to investors. Right? High dividend yields in narrow GCC economies may be recognition by public companies of the increasingly saturated local investment climate. Many companies are now targeting international growth to address this constraint.
Ghana: Closer Look at Timber
While “follow the Chinese” as an investment strategy is hardly scientific, we note the China-Africa Development Fund has offices in Ghana, Ethiopia, South Africa, and Zambia. Several of these stories may call for a closer look.
In Ghana, forestry and logging deserves particular attention, in our view. There are at least three themes which may coalesce:
Operating costs. Companies benefit from relatively low-cost land and labor in Ghana. Also, currently, a soft local currency, the cedi, further supports profitability. Timber companies price their goods in dollars, so a weaker exchange rate raises revenue on translation into the local unit.
Local construction. The discovery of offshore oil in Ghana in 2007 has led to a vibrant local construction industry as GDP growth has strengthened. Higher incomes have translated into greater residential and commercial construction.
Infrastructure. Ghana has evolved into a regional commercial center because of its widely respected achievements in governance. Attendant pressures will lead to improved road and port infrastructure, from which industry will benefit. Transmission pole demand is at historical highs.
These ideas align with other issues related to (1) structural timber demand as the global economy improves and (2) high biological growth rates in tropical climates. Meanwhile, there is sustained interest in timber among institutions worldwide. This is because of timber’s income and capital-gain potential, even after considering the illiquid traits of some direct investments.
Disclosures
This material is for general information only.Opinions and estimates reflect current judgment as of the date appearing on the article; they are neither all-inclusive nor can they be guaranteed to be complete or accurate.
(c) Codexa Capital LLC
www.codexacapital.com
