India’s massive power failure was a gift to both investment bankers and asset managers. There will likely be a surge in infrastructure-related financing and investment activity directed at South Asia.  We also look at sovereign wealth fund transparency; the UAE funds rank comparatively well. Our allocation guidelines for North Africa focus on Morocco, where we believe we will see sustained gains for both portfolio and direct investors once the European situation stabilizes.

The Next Bright Idea: South Asian Power Investment

The blackout in India was a colossal planning failure. Half the population without electricity? But it’s hard to be too critical. In America, a tree fell on a power line in Western Pennsylvania in August 2003 and knocked out the grid in eight states and parts of Canada. And a few years earlier, the Brazilians had their own problems. No power distribution system is perfectly reliable.

One thing is for sure, India’s massive power failure was a gift to both investment bankers and asset managers. There will likely be a surge in infrastructure-related financing and investment activity directed at South Asia.

Global headlines served as a sort of super-promotion for primary- and secondary-market players. What’s not to understand? Hundreds of millions of people depend on outdated generation and distribution capacity in a country looking to be an economic superpower.

No doubt some fine investment opportunities will emerge from this catastrophe; we too are working on a mandate. Pair India’s problems with similar ones in Pakistan and Bangladesh, and you generate one of the most obvious investment stories worldwide.

Our concern is that in a poor global environment—where investors are desperately seeking above-average gains— there will actually be too much money chasing these opportunities. And that will lead to compression of returns.

Further, the risk is not in structuring so much as implementation. Corruption has been pervasive in some power-related ventures. The dark side of opportunity here is the very real potential for a flood of investment scams in generation and distribution, as well as in related renewable energy projects.

As the level of global interest in the South Asian energy story takes on new dimensions, prudent investors should look carefully and cautiously at power deals that surge their way.

Sovereign Wealth Funds: UAE Funds Among Most Transparent

Not all government-owned funds are equal. They’re commonly ranked by estimated assets; the picture looks different if you rank them by perceived transparency. In the GCC, for instance, the UAE’s Mubadala is considered the most transparent, while Oman’s State General Reserve Fund is viewed as the least transparent.

State Investment Vehicles Across Islamic World (Ranked by Transparency)         

Source: Sovereign Wealth Institute, Q2 2012. Note: The Linaburg-Maduell Transparency Index was developed by the Sovereign Wealth Institute based on ten principals, such as providing up-to-date independently audited annual reports and clear strategies and objectives.


These rankings are tabulated by the Sovereign Wealth Institute, a commercial enterprise that’s an established resource for such information. Their Linaburg-Maduell Transparency Index is based on ten disclosure principals; it is revised quarterly. See www.swfinstitute.org for further information.

Our list is not complete. It includes only those funds in which the Sovereign Wealth Institute offers both estimated assets and a transparency rating. As a result, some institutions are excluded from this list, such as Saudi Sanabil and Emirates Investment Authority.

Our own experience validates the ranking of the five funds in the top tier. The Sovereign Wealth Institute claims adequate transparency is met with a score of “8.”. The gold standard when balancing both size and transparency may actually be Norway’s Government Pension Fund.

North Africa: Bias Toward Morocco

The turbulence in asset prices across North Africa has created some impressive pockets of value. But with a poor economic setting in Europe—representing these economies’ primary export target—we recommend a high degree of selectivity, especially in Egypt. Our enthusiasm is somewhat stronger for direct-investment opportunities than stock-market positions, given the need to focus on long-term potential in this region. A leading indicator for sustained regional recovery will likely be foreign interest in Moroccan assets.

Allocation Perspective: North African Markets (Comparative Evaluation as of August 2012)

Note: Given investor home-market biases, portfolio guidelines do not refer to a specific benchmark. Stock-market outlook typically focuses on earnings potential, valuation readings, and interest-rate policy. Direct-investment outlook incorporates long-term political and business risks. Any market likely offers specific opportunities that may contravene these guidelines.

*Performance data as of 7 August in US dollar terms using broad local-market indices: EGX 30 Index, Casablanca Stock Exchange Index, Tunidex. Source: Bloomberg, Zawya, IMF.


Egypt. As the largest economy in North Africa, this market can absorb the most investment capital. But we remain concerned about the country’s dependence on the external sector, including tourists. The transition to an Ikhwan-led government has been smoother than many expected, but much work remains to rebuild confidence. We’ve yet to see full clarity of economic-policy focus from the new administration. Traders may enjoy a periodic stock-market rally, but otherwise portfolio- and direct investors may want to refrain from commitments, except for well-considered one-off transactions.

Morocco. The opportunity here seems to be lost amid the noise of global recession. Investors have severely discounted equity prices in tandem with European turmoil, without considering the impact of proactive domestic policies. The smooth transition to an independent parliament over the past year is testimony to the rule of law. We think this stock market will recover nicely once Europe stabilizes; we are willing to be aggressive with our contrarian stock-market view. Direct investors should benefit from reform-related economic gains.

Libya. The July election seems to have satisfied international audiences, but we think pockets of tribal rule will continue to challenge the newly-elected parliament. While capital markets are in effect non-existent, the direct investor can look for deals outside the oil sector (which has long been sewn up by the international majors). Entrepreneurial opportunities exist in social-infrastructure areas such as health care, banking, and education. Private-equity success will depend heavily on understanding the nuances of different geographies within the country.

Tunisia. We want to like the near-term story more than we do, but Tunisia is a small market where the stock market has already seen relatively strong gains, more so in US dollar than local currency terms. While the tax-favored status of brokerage accounts is one factor, we argue that an underlying reason is public-sector confidence. We expect muted equity-market upside from here, but there may be direct-investment ideas that make sense in this interesting economy.

Much of the capital that once was available for North Africa is flowing elsewhere, especially Turkey. Both the strength of the Istanbul Exchange and the volume of direct-investment deals in the country suggest that international investors have turned their back on North Africa. Ultimately, this pattern will benefit the few who are willing to explore targeted investments. We’d start our search in Morocco.

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

             
 

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