The Anatomy of SSA

F
Frontier
ti Markets
M k t
presented by
Peter Mushangwe - Legae Securities

November 5 , 2009
SSA Frontier markets
™ The major SSA ex RSA markets include:

™ West Africa: Nigeria, BRVM, and Ghana

™ East Africa: Kenya, Uganda, Mauritius and Tanzania
™ Southern Africa: Zimbabwe,
Zimbabwe Zambia
Zambia, Botswana and Namibia

Our coverage would include Nigeria, Kenya, Zimbabwe, Ghana,

Z bi initially.
Zambia i iti ll
Concentration of coverage will be on banking, consumer,
construction and telecommunication
Nigeria dominates the SSA
SS markets, but diversification
f off coverage
will be pursued.

2
Agenda
™ Africa: Politics and Governance

™ Th Economics
The E i – The
Th Pillars
Pill off S
Sustainable
t i bl growth
th
™ Growing GDP

™ Falling
g inflation

™ Stabilizing exchange rates

™ “Demographic dividend”

™ Diversification of exports

™ The Frontier markets

™ Risks

™ Bullish View

™ Our industry
Ou dust y conviction
co ct o list
st
3
Politics and Governance
From Worse to Bad?
™ Political risks high.
g Number of countries under p poor g
governance have
reduced, governance structures are still largely poor.
™ Improvement primarily due to higher levels of education and more
awareness and participation by citizens.
™ Corruption levels high…becomes a barrier to growth.
™ Kenya, Nigeria, Uganda, Zimbabwe continue to rank highly in corruption

The Ibrahim Prize found no winner this year

Most SSA rank poorly on Amnesty International Corruption Perception
Index but incidences of corruption declining
B governments are b
But becoming
i more marketk ffriendly
i dl

4
Politics and Governance
Governemnets are becoming more market friendly. Eg are Uganda, Kenya, 
45
Zambia, Ghana. Mo Index ranking, 2008; Source: Mo Ibrahim Foundation 42
39
40

35 33

30

25
21
19
20 17
15
15
11
10 7
4
5
1
0

N
Nigeria
K
Kenya

C
Cote d Ivoire
G
Ghana

U
Uganda

Z
Zambia
M
Malawi

T
Tanzania
M
Mauritius

Z
Zimbabwe
B
Botswana

Best Worst

5
Politics and Governance - CPI

Corruption levels remain unacceptably high in most SSA countries, but 
countries like Mauritius, Botswana, Ghana compete favorably against 
European countries like Spain and Italy. CPI 2008 rankings, Source: Transparency 
International
0

‐20

‐40

‐60

‐80

‐100

‐120

‐140
140

‐160

‐180

‐200
200

6
Politics and Governance
Popularity or autocracy?
™ President Muammar Gaddafi (40 yrs)
™ President Dos Santos of Angola (30 yrs)
™ President Mugabe of Zimbabwe (29 yrs)
™ President Museveni of Uganda (23 yrs)
™ President Paul Biya of Cameroon (27 yrs)
™ President Denis Nguesso of Congo Republic (30 yrs)
™ President Hosin Mubarak of Egypt (28 yrs)

™ In some countries, opposition politics and media are vibrant .e.g.

Uganda
™ The GNU model could be bad for African politics in our view.

7
Economics
™ Africa’s contribution to the world GDP is very small, <5%;
™ GDP contribution should pick up on improved education and
technological standards;
™ The pillars that should sustain increased contribution, along conducive
political conditions are
p
™ Strong GDP growth trend;
™ Falling inflation rates;
™ Stabilizing exchange rates;
™ Demographic dividend; and
™ Diversification of economies/exports

8
Economics – GDP growth
1,800.00 Strong  GDP growth trend since 2002. GDP expected to reach US$1.5tn by 2014 for SSA. 
Source: IMF, Legae Calcualtions
1,600.00 1,549.01

1,400.00

1,200.00 1,122.71 1,148.72

1 050 10
1,050.10
1,000.00

800.00 734.82

600.00 514.54
397.44
400.00

200.00

0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

9
Economics – GDP growth

9% Strong recovery is expected, but we are concerned by infrastructural incapacities 
in some countries e g Uganda Nigeria Source: IMF, Legae Calculations
in some countries, e.g.  Uganda, Nigeria . Source: IMF Legae Calculations
8%

7%

6%

5%

4%

3% SSA
SSA 
SSA excl. Nig. & RSA 
2%
SSA per capita
1% SSA excl. Nig & RSA per capita.

0%
1997‐2002

2003

2004

2005

2006

2007

2008

2009

2010
‐1%

‐2%

10
Economics – GDP growth

7,528 
8,000  Per capita incomes continue to disappoint notwistanding the 
improvements,US$ Source: IMF, Legae Calculations
7 000
7,000 

6,000 
2009
2010
5,000  2014

4,000 

2,209
3,000 

1,7

9 
784 
1,445 
1,410 

1,313 
2,000 

863 
746 
667 
635 
584 

580 
546 

1,000 
231 

Kenya

Sudan

Angola
Zimbabwe
DRC

Nigeria
Côte d'Ivoire
Ghana
Mozambiquee

Uganda

Rwanda

Zambia
Malawi

Tanzania

11
Economics – GDP growth

8000 Oil producing countries show stronger  growth than non‐oil producing. Source: IMF,  20%

Legae Calucations 

7000
per capita income,US$ 15%
6000 CAGR ('95‐'07) (RHS)

5000
10%

4000

5%
3000

2000
0%
1000

0 ‐5%
DRC

Nigeria
Côte d'Ivoiree

Kenya
Ghana

Angola
Uganda

Rwanda

Sudan
Zambia
Malawi

Tanzania
Mauritius

12
Economics - Inflation

30 SSA average inflation rate  is expected to stabilize +/‐5%. This should support economic 
growth % Source: IMF, Legae Calculations
growth,%. Source: IMF Legae Calculations

25
Poor fiscal &  "commodity
monetary  inflation" 
20 policies weak
policies, weak 
currencies led 
to bouts of 
15 inflation 

10

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
13
 14
• volatility of currencies abated since CY2000, volatility increased in CY2008

MUR

ZMK
UGX

Jan‐09
9
KES

Jul‐08
Jan‐08
8
Economics – Exchange rates

Jul‐07
Jan‐07
7
Jul‐06
Jan‐06
6
Jul‐05
Jan‐05
5
Jul‐04
Jan‐04
4
Jul‐03
Jan‐03
3
Jul‐02
Jan‐02
2
Jul‐01
Jan‐01
1
Jul‐00
Jan‐00
0
Jul‐99
Jan‐99
9
Jul‐98
Jan‐98
8
Jul‐97
Jan‐97
7
Jul‐96
Jan‐96
6
Jul‐95
Jan‐95
5

0
1.2

0.8

0.6

0.4

02
0.2
Economics – Current Accounts

• Current account deficits are unhelpful to exchange rates, negatively affecting inflation outlook…
• …but stronger economic growth could continue to attract inflows.

Current Account % of GDP. Source: IMF, Legae Calculations

1997-2002
1997 2002 2003 2004 2005 2006 2007 2008 2009 2010
Oil-exporting countries -4% -7% 3% 8% 13% 7% 8% -8% -2%
Angola -13% -5% 4% 17% 25% 16% 21% -8% 0%
Botswana 9% 6% 4% 15% 17% 14% 7% -7% -5%
Ghana 9% 6% 4% 15% 17% 14% 7% -7% -5%
Kenya -2% 0% 0% -1% -3% -4% -7% -4% -5%
Nigeria -2% -6% 6% 7% 14% 6% 5% -9% -4%
Uganda -6% -5% -4% -4% -8% -9% -10% -9% -9%
Zambia -15% -15% -12% -8% 1% -7% -8% -9% -7%
Zimbabwe -3% -3% -9% -12% -7% -11% -29% -19% -30%

SSA -4%
4% -4%
4% -2%
2% -1%
1% 1% -3%
3% -2%
2% -9%
9% -6%
6%
SSA ex RSA and Nigeria -8% -7% -5% -3% -1% -3% -3% -11% -9%

15
Economics - Exports

50% Rising exports to Asia, as well as increased intra‐trade should bode well for  GDP 
growth,% of exports. Source: UNCTAD
45%

40% 1990
2007
35%

30%

25%

20%

15%

10%

5%

0%
EU USA Asia Africa

16
Economics – Asian Exports

China and India dominating exports by SSA. In our view, the diversification is 
beneficial to SSA economies,2007
China
India
Rest of Asia

40%

51%

9%

Source: UNCTAD

17
Economics – Debt

250% Lower debt levels reduces strain on fiscus,% of GDP,2007.  Source: UNCTAD

200% Ghana
Kenya
Nigeria
Uganda
150% Zambia

100%

50%

0%
2003

2004

2005

2006

2007

2008

2009

2010
1997‐
2002

18
Economics – Remittances
Remittances play an important role. Remittances dipped by 8% in SSA, but recovery 
has been recorded in countries such as Kenya, Uganda, Zimbabwe already. Top 15 
30.0% recipients of remittances ,% of GDP,2007.  Source: UNCTAD
26.5%
25.0%
25.0%

20 0%
20.0%

15.0%

10.0% 8.0% 7.8% 7.6% 7.5% 7.4% 7.5%

6.0% 5.9% 5.8% 5.5% 5.0% 4.8% 4.5%
5.0%

0.0%
Sierra Leon

Senegal
Liberia

Cape Verdee

Nigeria
Comoros

Togo
Lesotho

Kenya

Benin
Uganda
Gambia

Swaziland
Ethiopia
Guinea‐Bissau
ne

19
Economics - Demography
• Will SSA reap a demographic dividend? About 1/4 of the population is between 5 and 14 yrs old
• The population will support internal demand
• Urbanization projected to rise. Social ills?

Mid-2008 Urban (% of Projected Projected Ppn

Country <5yrs 5-to-14 >65
Ppn, mn total ppn) Ppn 2025 2050
Nigeria 148.1 17% 27% 3% 46% 205.4 282.2
Ethiopia 79.1 17% 28% 3% 16% 110.5 147.6
Democratic Republic of Congo 66.5 19% 28% 3% 32% 109.7 189.3
South Africa 48.3 11% 21% 4% 59% 51.5 54.8
Tanzania 40.2 18% 27% 3% 24% 58.2 82.5
Sudan 39.4 15% 26% 4% 41% 54.3 73
Kenya 38 17% 26% 3% 21% 51.3 65.2
Uganda 29.2 20% 30% 3% 13% 56.4 106
Ghana 23.9 14% 25% 4% 48% 33.7 48.8
Cote d Ivoire 20.7 15% 27% 3% 47% 26.2 34.7
Mozambique 20.4 18% 27% 3% 35% 27.5 37.2
Cameron 18.5 16% 26% 4% 54% 25.5 34.9
Angola 16.8 19% 28% 2% 54% 25.5 42.7
Malawi 13.6 18% 29% 3% 17% 20.4 30.5
Zimbabwe 13.5 13% 27% 4% 36% 16 19.1
Zambia 12 2
12.2 17% 28% 3% 35% 15 5
15.5 19 3
19.3

SSA 809 17% 27% 3% 37% 1161 1698

Africa 967 16% 26% 3% 38% 1358 1952
World 6705 10% 19% 7% 49% 8000 9352

Will this cohort transform SSA economies when economically active?

Source: Population Datasheet
20
SSA Frontier markets – Mkt Cap
Companies' market caps increased substantially during the bull run, 2001‐
2007. Companies with mkt cap >US$100mn reduced in 2008. Source: SSA Stock 
g , g
Exchanges, Legae Calculations
100%
<US$100mn
90%
>US$100mn
80%

70%

60%

50%
8 %
87% 91%
40% 78% 81% 77%
70%
30% 62%
55% 52%
20%

10%

0%
2000 2001 2002 2003 2004 2005 2006 2007 2008

21
 SSA Frontier markets – Financials
domination
™ Despite the low penetration, banking assets dominate capital markets.
™ Financial services dominate market capitalization in East Africa and
West Africa with 34% and 27% respectively.

22
SSA Frontier markets – Liquidity
35%
Low liquidity levels, turnover/market cap is low...
30%

25%

20%

15%

10%

5%

0%
Nigeria

Kenya

Ghana

BRVM
Uganda

Malawi

Tanzania
Zimbabwe
...markets lack breath and depth as well, equity listings
250 
214 

200 

150 

100 
76 

46 
50  40 
33 
21 
11 
‐
Nigeria Zimbabwe Kenya BRVM Ghana Zambia Uganda

Source: SSA Stock Exchange, Legae Calculations 23

SSA Frontier markets – Liquidity

Market cap/GDP ratios are low. The ratio is less useful for valuation purposes 
due to low listings. Source: SSA Stock Exchanges, IMF, Legae Calculations 

Uganda

Zambia

Ghana

Nigeria

Botswana

Kenya

Mauritius

Zimbabwe

0% 20% 40% 60% 80% 100% 120% 140%

24
SSA Frontier markets – Liquidity

Nigeria has the highest liquidity, but Kenya and Zimbabwe are improving. Bigger 
350 companies generally dominate trading. YTD value traded,US$mn. Source: I
companies  generally dominate trading. YTD value traded,US$mn.  Source: I‐net
net, 
Legae Calculations
300

250

200

150

100

50

0
Innscor
Barclays Kenya

Delta
Dangote Flour

EABL
Econet

UBA
Equity Bank
Safaricom
CBZ Zimbabwe

Zenith Bank
Old Mutual

25
SSA Frontier markets - Returns
™ The markets exhibit high kurtosis and negative skeweness
™ We, however, opined that this is a well know factor by institutional
investors.

26
SSA Frontier markets - Performance
Mixed performance on a YTD basis.  Currency recovery improved US$ returns 
170% generally, except for Ghana and Nigeria:. Source: Bloomberg, I‐net, Legae Calculations
143%
LC
USD
120%

70% 57%
52%

20% 15%
9%
‐34% ‐17% ‐14% ‐5% ‐5% ‐1%
Niggeria

MSSCI Frontier
Ke nya
Ghana

BRV

Uganda
Maalawi

Zam
Tan

Maauritius

Zim
MSSCI EM

mbabwe
mbia
nzania
VM

‐30%

‐56%
‐80%

27
SSA Frontier markets - Performance

16 SSA Frontier markets outperform MSCI EM and MSCI Frontier. Outperformance is better for illiquid 
p p q
markets (e.g Ghana, Zambia). Source: Bloomberg, Legae Calculations

14

12
Botswana
Ghana
10 Kenya
Nigeria
BRVM
Zambia
8
Mauritius
MSCI Frontier
MSCI EMEA
6 MSCI EM

0
Jul‐‐02

Jul‐‐03

Jul‐‐04

Jul‐‐05

Jul‐‐06

Jul‐‐07

Jul‐‐08

Jul‐‐09
Mar‐02

Mar‐03

Mar‐04

Mar‐05

Mar‐06

Mar‐07

Mar‐08

Mar‐09
Novv‐02

Novv‐03

Novv‐04

Novv‐05

Novv‐06

Novv‐07

Novv‐08
28
SSA Frontier markets - Performance
Malawi has the best  5‐yr return, 770%. Kenya and Nigeria disappoints . Local 
curreny returns. Source: I‐Net, Legae Calculations
770%
300%

CY2008 249%
250% 3YR
5YR

200%

143%
150%

100% 84%

53%
50%

‐9%
9% 5% NM ‐21%
0%
Nigeria

Kenya

Ghana
BRVM
Uganda
Zambia

Malawi
Tanzania
Botswana

‐50%

‐100%

29
SSA Frontier markets - Performance

• SSA Frontier markets outperformed MSCI EM in CY2008, US$

2000 2001 2002 2003 2004 2005 2006 2007 2008

Nigeria 39.2% 24.4% 4.3% 50.5% 21.5% 4.9% 40.4% 90.9% -54.2%
Ghana -34.3% 10.3% 27.7% 141.7% 88.0% 30.6% 3.6% 25.6% 20.2%
Mauritius -18
18.3%
3% -19
19.5%
5% 21.7%
21 7% 52 6%
52.6% 19 8%
19.8% 4 6%
4.6% 40 9%
40.9% 77 6%
77.6% -43
43.4%
4%
Zambia 1.4% 12.5% -4.8% 29.0% 73.4% 125.2% 3.1% 19.1% -39.0%
Kenya -22.6% -29.7% 2.4% 104.0% 3.4% 47.3% 47.9% 5.2% -47.2%
BRVM -23.8% -2.8% 14.3% 23.9% 23.3% 11.4% 12.2% 38.7% -15.1%
MSCI EM -31.8% -4.9% -8.0% 51.6% 22.4% 30.3% 29.2% 36.5% -54.5%
Out/Underperformance vs.
vs MSCI EM
Nigeria 71.0% 29.3% 12.3% -1.1% -0.9% -25.4% 11.2% 54.4% 0.3%
Ghana -2.5% 15.2% 35.7% 90.1% 65.6% 0.3% -25.6% -10.9% 74.7%
Mauritius 13.5% -14.6% 29.7% 1.0% -2.6% -25.7% 11.7% 41.1% 11.1%
Zambia 33.2% 17.4% 3.2% -22.6% 51.0% 94.9% -26.1% -17.4% 15.5%
Kenya 9.2% -24.8% 10.4% 52.4% -19.0% 17.0% 18.7% -31.3% 7.3%
BRVM 8.0% 2.1% 22.3% -27.7% 0.9% -18.9% -17.0% 2.2% 39.4%

Source: Bloomberg, Stock brok ers Zambia, Legae Calculations

30
SSA Frontier markets - Performance

Weak correlation coefficient ratios. Weekly local curency returns since CY2002

• Low correlation provide diversifications benefits.

• Correlation among SSA markets is weak although strengthening
• SSA provide investors with an asset class that has a distinct profile

MSCI MSCI
Botswana Ghana Kenya Nigeria BRVM Zambia Mauritius
EEMEA EM
Botswana 1.00
Ghana -0.03 1.00
Kenya -0.02
0 02 0 00
0.00 1.00
1 00
Nigeria 0.09 0.01 0.01 1.00
BRVM 0.12 0.02 -0.01 -0.01 1.00
Zambia 0.19 -0.02 0.09 0.18 0.10 1.00
Mauritius 0.07 -0.07 0.22 0.12 -0.03 0.12 1.00
MSCI EEMEA 0.02 0.00 0.15 0.05 -0.06 0.01 0.22 1.00
MSCI EM 0.01 -0.01 0.16 0.05 -0.04 -0.02 0.31 0.90 1.00

Source: Bloomberg, I-net, Legae Calculations

31
SSA Frontier markets – Opportunities

Why we are bullish about SSA Frontier equities?

a) strong earnings growth

b) low real interest rates, negative is some instances should push money into equities

c) rising local investors' participation, particularly retail investors should support valuations.

d) increasing saving rates, and transforming pension sector

e) strong issuance pipeline i.e. privatization to continue. Lower CoE attract private issuances

f) foreigners'
f participation should support valuations as investors seek growth

32
SSA Frontier markets – Opportunities
Our industry conviction list
Sector Current situation Catalyst
Consumer/Retail •  Higher inflationary risks despite  ability to pass on •  growing per capita income
•  Employment risks •  expanding middle class
•  rising urbanization
•  stabilizing inflation rates

Infrastructure/Construction •  Inadequate infrastructure i.e. roads, water/sanitation •  government spending

•  Poor state and capacity i.e. malls, electricity • public and private partnerships
• increasing modernization
•  increasing modernization

Mobile and IT •  low penetration rates, but services becoming essential •  expanding per capita

•  poor infrastructure supportive of mobile telephony vs. •  rising modernization
mainland telephone demand

Health and pharmaceutical •  HIV prevalence high •  rising per capita income

• Malaria and other tropical diseases •  rising urbanization/modernization
•  Population more health conscious

Mi i & C
Mining & Commodities
diti •  Top producers of copper, gold, diamond, oil
T d f ld di d il •  global and internal demand
l b l di t ld d
•  infrastructure build up
•  urbanization

Banking & financial services •  Low penetration rates on both liability and asset •  increasing credit demand

Ge e a y o e cap ta a ets e posu es
•  Generally lower capital markets exposures •  leverage from economic growth
e e age o eco o c g o t

33
Discussion

Thank you
y

34