An undiminished faith in the resurgent Silk Road
Published in:
Financial Times
08.02.09
Over the past 10 years most European and US stock markets have generated returns close to or below zero. During the same period, markets in Africa and the Middle East generated double-digit returns. The world is shifting.
Thus runs the core rationale behind Silk Invest, an investment boutique specialising in Africa and the Middle East, set up in June 2008 by Zin Bekkali, formerly of Fortis Investments.
It is a simple prediction, says Mr Bekkali, and one his firm is not alone in making. The developed countries will face nil growth in the coming years; growth will take place elsewhere, for example in Africa where population growth is 3 per cent a year. “People on the Mediterranean see this change the best,” he says. “Japan also sees it more clearly than we do.”
The world trade routes are shifting back to their original structure where Asia, Africa and the Middle East accounted for the biggest part of the world’s GDP
Silk Invest’s vision is more radical than most, however. The company, which has partnered with DZ Bank International, IPConcept Fund Management and the Dutch brand agency Springer & Jacoby International, is named after the Silk Road, the ancient trade route. Its founders believe “the world trade routes are shifting back to their original structure where Asia, Africa and the Middle East accounted for the biggest part of the world’s GDP”.
To support this hypothesis Silk Invest takes a long-term view – very long-term. A company chart showing global GDP down the ages has figures dating back to 1000 AD. At that time, Asia had 61 per cent of global GDP, Africa 11 per cent and the Middle East 10 per cent. Western Europe was a GDP minnow and the US did not exist. Then Europeans discovered America, and western Europe and the US became economic heavyweights. By 1950, they had 53 per cent of global GDP between them, with Asia, the Middle East and Africa a paltry 23 per cent.
Now the pendulum is swinging back, says Silk Invest. Recent figures (2006) show the western share of GDP down to 40 per cent, while the “Silk Road” share has risen to 44 per cent, a trend Silk Invest believes will continue.
“Europe, the US and Japan have reached their full potential,” says Mr Bekkali. “The only way to grow was to leverage, but leverage has a cost and can create problems.”
But, as Mr Bekkali readily concedes, while the crisis seems to vindicate Silk Invest’s world view, it has also given investors serious jitters and made it hard to persuade them to try something new. Back in June 2008, Silk Invest’s founders were not too unhappy the markets were going down.
“That was then,” says Mr Bekkali. “What we’ve seen since is globalised panic. People don’t care about fundamentals. They’re just pushing the sell button.”
Now is the best of all possible moments to invest in Africa and the Middle East, he argues, with valuations attractive. African GDP is predicted to grow by 5-6 per cent in 2009, the US to be in recession. But still people are not moving their money out of the developed markets and into Africa.
“They are afraid,” says Mr Bekkali. “It’s quite unfortunate. You would expect investors to be a bit more rational.”
This fear means Silk Invest has had to scale back its expectations. Initially, it hoped to raise €50m (£44m, $64m) for its two inaugural funds, an African equity fund and an Arab equity fund, both Luxembourg-domiciled Ucits funds scheduled to launch on 15 February. Now it is looking for €20m per fund. Of course, some might argue that being afraid to invest in the Middle East and Africa, particularly Africa, is rational.
There are a lot of interesting companies. It’s not just a regional story, but also a micro story
Not all news emanating from the continent has been good and the suspension of dealing in the New Star Heart of Africa fund in December 2008 (“due to illiquid sub-Saharan markets”, according to New Star AM) gives further pause.
But Mr Bekkali’s faith in the resurgent Silk Road is undiminished. It is a question of knowing what you are doing, he says. “There are a lot of interesting companies. It’s not just a regional story, but also a micro story.”
The New Star suspension was “disappointing because it gives the asset class a bad press”, but explicable by the lack of local expertise behind the fund. “It was managed by an ex-UK small cap fund manager. Africa is a big continent. You need to have a network there to select the right stocks and to trade.”
With its international team, which includes staff of Nigerian, Egyptian, Moroccan, Zimbabwean and South African nationality, Mr Bekkali, himself a Dutch and Moroccan national, feels Silk Invest has that network. His team is ready and waiting to fulfil the needs of investors, who, Mr Bekkali believes, should all be allocating 5 per cent to African and Arab markets.
That might sound like a fantasy number. At the moment, 99 per cent of investors have no allocation whatsoever. Mr Bekkali concedes that those investors are largely unreachable at the moment and Silk Invest is concentrating its marketing efforts on investors who already have an allocation.
Then again, if there is one lesson the crisis has hammered home, it is how quickly things can change.
“Five years ago Bric [investment in Brazil, Russia, India and China] was just starting and no one knew about these markets,” says Mr Bekkali. “Now we are in a position where people are starting to understand them. Five years from now, things will have changed as much again.”
© Financial Times, 08.02.09