Wednesday, March 23, 2011

How Serious Is Political Risk for Private Equity in Africa

Just as Africa is being touted as the last investment frontier capable of delivering super returns, the recent populist ousting of Egyptian president, Hosni Mubarak, and Tunisian president, Zine al-Abidine Ben Ali, has raised for many investors the continent's old ghost of political risk. And, yes, in extreme situations such as we have seen in Egypt, where trade and tourism stopped almost completely for nearly three weeks, it is difficult for businesses of most types and sizes to escape the negative consequences.
However, for those of us who've been operating in the private equity field in Africa for more than a decade, the political upheavals happening now are very different from the internecine and anti-colonial warfare that has scarred the continent in the past. They're part of the positive transformation of Africa - leading to democracy and greater stability. What the world is seeing is an inevitable extension of what happened in South Africa in the 1990s, with the release from prison of Nelson Mandela and the conversion of the country into a democracy with one of the most advanced bills of rights in the world - and an economy that is now ranked 45th out of 133 by the World Economic Forum's 2010 Global Competitiveness Report.
It's also an extension of the socio-economic changes that have resulted from steady investment by organisations like ours in mid-market businesses that supply the basic necessities of life to their local communities. Entrepreneurs running good mid-sized businesses that directly serve their communities create employment, and, as the usual knock-on effect, more wealth within their societies. Once that bug bites, it's very difficult to keep a repressive regime going.
So, private equity in Africa's mid-market hasn't just provided much needed funds. It's laid the groundwork for political change - and, ultimately, transformation at every level of society: social, economic, and political. And it has done so at an extraordinary juncture in history. The comprehensive transformation of society on which Africa is now embarking, wittingly or otherwise, has never been attempted in modern times or in such a globalised environment.
By contrast, when affirmative action - aimed at bringing economically disadvantaged people into positive economic action - was initiated in the United States (US) about 50 years ago, country economies were more isolated. What the US did in order to bring the more or less 15% of its racially underprivileged people into the mainstream had little knock-on effect on its economic partners or, really, on global opinion of the US. The same can be said of Japan's extraordinarily successful attempts during the latter half of the twentieth century to transfer its economy from the hands of a financial, political, and social elite into the hands of the middle class. No-one was watching. Very few outside of Japan were affected - until the transformation was complete and Japan had become an economic force. Aside from the strategic interest followed by economic support from the US, Japan was free to implement, misstep, and tweak its system until it got it right.
As Egypt and Tunisia have realised, African countries have no such luxury. They have to grapple with policy reforms and socio-economic problems of massive dimensions under a global spotlight. Worse, they must participate in a knowledge-based, globalised economy along with other developing countries, all competing in the same markets and for the same investment funds. If a country slips in terms of competitive capability, its place will be taken by any one of 20 or 30 others.
That said, Africa has a huge advantage. In the absence during the past several decades of large corporates and multi-nationals, the small and medium-sized businesses have kept local economies alive.

Article Source: http://EzineArticles.com/5996070

Tuesday, March 22, 2011

The Emerging Issue of QE2 Expiration

This is a short but effective article that communicates concern over several world events and the lack of movement in stock prices in response to the uncertainty.

Vigna, Paul, 2011. It's easy to keep drinking when the fed's buying. DowJones Market Talk, Mar. 22.

The author attributes the lack of concern to Quantitative Easing 2 (QE2), the program by the Fed to purchase government bonds thus injecting large sums of money into the US economy. Of course so many bondholders are from foreign countries that there is perhaps some leakage in the simulative effect of the program.

The main issue; what happens to stock prices when QE2 stops in Jun.?

I would like to see more articles in the business press on this topic. My guess is that there will be down ward pressure on stock prices.

I agree with the author that no one yet knows the full effect of the Japanese earthquake and tsunami. It will take several more weeks to play out.

Regional Agricultural Systems - The Need for Basic Research


I notice several articles in today's WSJ that note the effect of rising fuel prices on various industries.

For example, Delta Airlines is cutting capacity because of fuel costs.

I continue to believe that regional agricultural systems in the face of mounting costs of transportation are an extremely important topic to study. Sadly, enough basic research does not exist on the topic, and efforts to create conditions for implementation are fractured.

It is my hope there will be more research in the area soon.

Excellent Article in the WSJ on the Dangers of the Federal Deficit


This is not a new message, however, this article puts the issues front and center:

Seib, Gerald F., 2011. As budget battle rages on, a quiet cancer grows. The Wall Street Journal, Mar. 8.

For a long time, I have been concerned regarding the trade and budget deficits. In various ways, these have become structural and are draining resources from the US at an alarming rate.

In countries like Japan, most of the government bond purchases are by citizens. Interest payments stay in the country.

In the US, perhaps as much as 60% of Fed Bonds are purchased by overseas governments. Hence, interest payments on American debt moves overseas, taking money out of the economy.

From the article,

"A recent study of the debt sponsored by the National Academy of Sciences cites one credible projection that, by 2030, the U.S. could be transferring 7% of its entire economic output, or $2.5 trillion, to foreigners every year to service its debt."

Given what appears to be a situation of structural low economic growth in the wake of the Financial Crisis of 2008, the only salvation of Federal budget cuts beginning with FY2011.

Everyone needs to work together to turn this situation around for the benefit of America.

Monday, March 21, 2011

The Japanese Yen - A Major Issue for Mon.

The continued strengthening of the Yen is a very bad thing for Japan and the world.

The WSJ has a front-page article on the issue in today's digital edition. Evidently, markets are closed on Mon. in Japan for a holiday, yet the Central Bank of Japan expects to intervene into currency markets to prevent the Yen from slipping to less than 80 per dollar.

My theory is that the imbalance of capital flows brought about by pegging to the Dollar (China) has led to the Yen being stronger even before the earthquake and tsunami.

A further increase in the Yen will snuff off Japanese exports and allow other East Asian nations to gain market share for various manufactured products. China has a great deal to gain from an ultra strong Yen, even as the ruling elite chooses to fix the rate of exchange for the Yuan.

The great natural disaster of the Sendai earthquake and tsunami might be the event to trigger an accelerated currency war between China and the rest of the world.

It is my opinion that this is the reason why the G-7 is acting together to stop the Yen's rise.

Video from Japan - Earthquake and Tsunami


Special thanks to a colleague from Japan who has passed along these videos of the Japanese earthquake and tsunami:



In viewing the second video, I wonder about the extent of less severe losses in urban areas like water systems, streets, and other infrastructure. The amount of ground movement and shear shown in the video is amazing.

Sunday, March 20, 2011

Japan Earthquake Aftershocks


As I understand, there continue to be aftershocks in Japan. These are frightening people, many who have not had a full nights rest since last Fri. when the earthquake and tsunami hit.

This seems like a significant amount of seismic activity. In some cases, the aftershocks have been classified as earthquakes along different fault lines.

I remain quite concerned for Japan.