Emerging Markets Specialist Exotix on the Long Term Values of Emerging Markets, Looking to Develop Involvement in the Iraqi Stock Market

Benedicte Gravrand, Opalesque London: Amir Zada, associate director at Exotix, an investment broker specialising in emerging markets and frontier markets with expertise on illiquid, distressed, undervalued debt, spoke to Opalesque about some recent issues related to emerging markets and especially Africa.

Emerging markets, and of late, frontier markets, have been the way out of economies suffering from subprime-related troubles. This month (July) alone saw London-based firm Fincere Ltd. launching a global emerging markets hedge fund, HSBC’s fund arm announcing plans for a frontier market fund, Calstrs looking to allocate to frontier markets and news of sovereign wealth funds turning to emerging markets. Although a recent Fitch report says there has been a sharp acceleration in inflation in several EM economies, “posing a major challenge to relatively young monetary and inflation targeting regimes”, nevertheless, activity indicators for most emerging (and developing) market economies remain strong. Fitch forecasts still impressive growth of around 6% this year, albeit down from more than 7% in 2007” (Coverage.)

The Credit Suisse / Tremont Emerging Markets Hedge Index was up 2.14% in May and -1.99% YTD. The Barclay Emerging Markets Hedge Fund Index did not do so well as it returned -3.58% (est.) in June and -8.86% (est.) YTD. And the Eurekahedge Emerging Markets Hedge Fund Index returned -2.78% (est.) in June and -5.30% YTD.

Local currency funds are favourite
“Investors are flocking to emerging market debt, brushing past securities issued in hard currency to buy sovereign bonds in Mexican pesos, Brazilian reals or Turkish lira,” reported the FT. According to figures from Standard Asset Management, local currency assets accounted for most of the inflows, attracting about $212m, compared with $63m into blended funds. “If you look at the way hard currencies have been performing of late… Comparing to 2000, the values of local currencies is so much more,” Mr. Zada said. “So for the near future at least, local currencies are very beneficial.”

IPOs: more to come from emerging and frontier markets
It was reported last month that the London Stock Exchange (LSE) was seeing an increasing amount from emerging market companies raising IPO capital. “The smaller companies tend to list on the Alternative Investments Market (AIM) ,” Mr. Zada said. “The larger economies’ companies (from BRIC economies) would very likely do an IPO on the LSE purely because of capital restraints. But you do have smaller economies’ companies that are doing extremely well. Nigeria for example, in which GDP is growing at 5% p.a., has a lot of companies that are going for IPOs in alternative markets.”

Equities in Africa: long term value can be outstanding
EM equities have gained 12% since the end of January and so have shown obvious profitability. Although some believe the near-term risk/reward trade-off for EM equities has deteriorated ( Source).

“Exotix’s focus on equities is purely on sub-Saharan Africa at this particular moment. Africa as a whole, and in particular places like Nigeria, is really in the early stages of growth. So even though of lot of these companies are listed locally or externally and the trading potentially expenses valuation; despite that, it is still at an early stage of growth so the long term value involved in getting hold of these stocks is still predominantly out there. There is still so much value left in those companies in the long run because of the life cycle of the stock and the countries that they are involved in.”

Source:
Emerging markets specialist Exotix