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Annex 2 – What are sovereign wealth funds?

The Sovereign Wealth Fund Institute of Las Vegas, USA defines SWF as “a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports”. That leaves out central banks’ reserves for balance-of-payments or monetary-policy, state-owned enterprises (SOEs), pension funds for government employees and assets to benefit individuals.

The term “sovereign wealth fund” has been around since 2005 when it was invented by Andrew Rozanov, then of State Street Global Advisors. However, there have been natural-resource funds since 1876 and the first SWF was the Kuwait Investment Fund in 1953.

Since then they have grown fast – total assets under management were $895bn in 2005, while an October 2014 count by the SWF Institute puts them at $6.8 trillion. Global giants are Norway’s Government Pension Fund with $893bn and Abu Dhabi Investment Authority with $773bn. Four of the top nine funds are Chinese, with $1.8 trillion between them. (Global stock market capitalization in 2013 was $62.6 trillion). The funds hit the global news agenda after the 2008 financial crisis as high oil prices helped increase some states’ spending power and funds snapped up high-profile investments including top financial firms.

SWFs have objectives such as helping to smooth expenditures when oil, gas and diamond revenues are volatile and helping governments set realistic budgets. They help governments avoid overspend when prices are high, for instance on legacy projects such as grandiose concert halls, or running out of cash when oil prices fall, leaving projects such as roads half-built. Funds can help governments save for the future in good years, especially useful if the governments are not good at spending well. Funds can also help countries ward off “Dutch disease” by keeping some revenues in foreign currencies.

9 reasons Africa tops investment agendas

Here are 9 reasons why Africa is topping long-term investors’ agenda. According to press releases Eddy Njoroge, Chairman of the Nairobi Securities Exchange, told this week’s African Securities Exchanges Association conference in Kenya they are:
1. Recent research by economists indicates that 9 of the 20 fastest-growing economies are in Africa.
2. A recent report by Deloitte states that Africa’s economy will grow from $1.1 trillion to $3.9trn in the next 5 years.
3. The value of exports from Africa has risen from $170 billion in the late 90’s to $800bn last year. Africa is the only continent to have a trade surplus with China which would probably explain why several Chinese firms are setting up shop on the continent.
4. According to the African Development Bank, Foreign Direct Investment (FDI) into African economies will reach a record $80bn this year, with most of the money being directed to countries without natural resources but which nevertheless present attractive opportunities in other diverse sectors.
5. Today, Africa is the second most populous continent on earth with a current estimated population of 1.12bn. The Washington-based Population Research Bureau estimates that this population would more than double to 2.4 bn by 2050, with sub-Saharan Africa making up a headcount of 2.2bn.
6. Currently, the African middle class is estimated at 123 million with a projected rise to 1.1bn by 2060. Investor and philanthropist George Soros has termed this demographic shift as “the world’s fastest growing middle class.”
7. Infrastructure has played key part in Africa’s recent economic transformation and will need to play an even greater role if the continent’s development targets are to be realised. Africa’s largest infrastructure deficit is to be found in the power sector. The 48 countries of Sub-Saharan Africa less South Africa (with a combined population of about 780m people) generate roughly the same amount of power as Norway (with a population of 5m).
8. It is estimated that Africa’s infrastructural investment requirement will be $38bn per year and a further $37bn for operations and maintenance- an overall price tag of $75bn per annum. This translates into some 12% of Africa’s GDP. There is currently a funding gap of US$35bn per year.
Njoroge said Africa’s securities exchanges are key: “The conference gives us the opportunity to tell our own success stories; the story of an Africa that is on the rise and how we, the capital market practitioners, can transform a potential into a reality while ensuring that at all times, the fruits of economic success are widely shared across the population… Strengthening stock exchanges to support our capital-markets ecosystem will fuel economic growth. The Nairobi Securities Exchange will continue to work together with other stock exchanges strengthening Kenya’s position as East Africa’s financial services hub.”

Ethiopia’s $865m rail finance part of $15bn rail projects

China rolling stock for Ethiopia (photo from: www.tigraionline.com)

China rolling stock for Ethiopia (photo from: www.tigraionline.com)

The Ethiopian Government recently closed a $865 million financing package to fund part of the development of the country’s giant new railway infrastructure. One banker on the deal was reported by Reuters as saying: “This is a huge financing for Ethiopia, it is the first commercial deal of this size we have seen. Banks have a growing appetite for the Ethiopian market and we expect to see more deals like this.”

ERC is busy with 8 railway routes stretching 5,060 km, at a cost of $2m-$3m per kilometre. This includes rebuilding the Addis Ababa-Djibouti railway and lines heading north and south-west. A 36.5km mass transit railway is also being built in the capital, Addis Abeba.

The latest financing is split between a $450m commercial loan for 7 years, which includes a syndicate of lenders from Europe, Africa, the Middle East and the US, and pays 375 basis points over Libor. There is also a $415m 13-year loan backed by the Swedish Export Credit Guarantee Board (EKN) with Eksport Kredit Fonden (EKF) and Swiss Export Risk Insurance (SERV) export-credit agencies also included. The financing will be used to build the Awash-Weldia/Hara Gebeya Railway Project, one of the key railway corridors that will form part of the national railway network and connect northern and central parts of Ethiopia.

Turkey’s global rail company

Parastatal Ethiopian Railways Corporation (ERC) is undertaking the project construction, which will be built in the next 3 years. Turkey’s Yapi Merkezi Insaat ve Sanayi AS is the appointed contractor on the project and will design and construct the 389km railway line starting north east of Awash and going north through Kombolcha to Weldia under a 3-year $1.7bn project signed with ERC in Dec 2012. It will connect with the Addis Abeba-Djibouti line being built and with the Woldia/Hara Gebeya-Semera-Dicheto-Elidar project which will connect northern Ethiopia with Tajourah port in Djibouti, according to this report.

Credit Suisse acted as co-ordinating commercial facility arranger and export credit agency facility lead arranger. Some of the loans have already been disbursed. In addition, Deutsche Bank was the mandated lead arrangers for the EKF financing ($181m), ING Bank for the EKN financing ($83m) and KfW IPEX-Bank for SERV backed facilities ($151m).

In addition, Turk Eximbank provided a parallel financing of $300 million for the Turkish goods and services under the same project. Yapi Merkezi is a leading transportation infrastructure company and built the Dubai Metro Project, Casablanca tramline and Ankara-Konya high-speed rail line.

The financing has also been arranged under the OECD Common Approaches for Officially-Supported Export Credits and Environmental and Social Due Diligence which commit OECD countries to taking environmental and social impacts into account when granting officially supported export credits.

China’s $3bn finance to reach Djibouti

Export-Import Bank of China has pledged loans totalling $3bn to support Chinese railway construction companies on the 756km line from Addis to Djibouti, according to this in-depth overview of Ethiopian and Chinese relations. It runs parallel to the abandoned Imperial Railway Company of Ethiopia track built between 1894 and 1917. China will also provide most of the rolling stock, including locomotives worth millions, according to this story in Financial Times.

India to add $300m

In June 2013, India’s Exim Bank approved a $300m loan at 1.75% interest to finance a link from Asaita (670km from Addis) to Djibouti’s planned port at Tajourah. Debo Tunka, deputy CEO and head of infrastructure development at ERC reportedly said: “The new line will be very important for Ethiopia because it will give us an access to a second port and boost economic activities in the country,” The credit will be released once feasibility studies are done and contractors are still to be appointed. Tajourah will have a dedicated terminal for shipments from Allana Potash which is developing a $642m potash in northeast Ethiopia, according to Bloomberg.

Tanzania’s $10bn China-funded port will start in 2015

China is to build a huge new port and special economic zone in Tanzania worth at least $10 billion. Construction is due to start on 1 July 2015 as the country bids to rival Kenya’s Mombasa as transport hub for East Africa and is also investing in road, railways and major developments in commercial capital Dar es Salaam, 60 kilometres south.

Last Sunday, 26 Oct, the construction agreement for the port and associated 22,000 acres zone was signed in Shenzhen, southern China, with Tanzanian President as witness. According to a statement from the Office of the President, reported on Reuters: “The Tanzanian Government signed a memorandum of understanding with two major international institutions … to develop the Bagamoyo economic zone”.

It was signed with
• China Merchant Holding International (CMHI, based in Hong Kong) which claims to be “the largest public port operator in China and… leading… in the global port industry”. and
• State General Reserve Fund (SGRF) of Oman, the sultanate’s biggest sovereign wealth fund.

An earlier report on website Aid Data said the agreements also covered CMHI building railway infrastructure leading up to the port and the economic zone. Initial financing was $500m in 2013, supplied by Export-Import Bank of China.

Dar es Salaam harbour. Photo: Tom Minney

Dar es Salaam harbour. Photo: Tom Minney

A framework agreement between Tanzania and the Chinese port operator had been signed when Chinese President Xi Jinping visited Tanzania in March 2013, the first country on his African tour soon after his inauguration.

An official said it had taken time to set a start date for building work because of other negotiations about infrastructure to link the port to national transport networks. Li Jianhong, executive chairman of CMHI, asked Tanzania’s Government at the signing of the contract to remove obstacles that have delayed implementation. President Kikwete said in the statement: “We will do everything possible to ensure that this project takes off because it will bring enormous economic benefits to the entire country,” according to Reuters.

Separately, Tanzania and China on 24 Oct signed deals with Chinese firms worth more than $1.7 bn, including one to build a satellite city to ease congestion in Dar es Salaam, deepening Beijing’s ties with east Africa. China is financing a $1.2 bn natural-gas pipeline that will run 532 km and in 2011 China’s Sichuan Hongda Co Ltd signed a $3bn deal with Tanzania to mine coal and iron ore. The new port is expected to handle 20 times more cargo than the existing port at Dar es Salaam, according to Aid Data website. It will act as a hub for raw materials coming in and out neighbouring landlocked countries, as well as bringing Chinese manufactured goods into the region, according to this earlier investigative report.

The report also said there were questions after the new port was pushed through Parliament by the ruling party with little debate. Apparently Dar es Salaam port is underused and with enough capacity until 2016-2020 depending on traffic. Other ports such as Tanga in the North and Mtwara in the South are dormant. Bagamoyo is a historic town.

The Bagamoyo agreements include large container and vehicle facilities, combined with smaller scale dry bulk and multi-purpose terminals at Mwambani Bay. It plans to handle more than 20m containers per year and also includes construction of a standard-gauge railway link to the central corridor railway at Ruvu Station and an extended link with the TAZARA railway. A highway to link the port to the Uhuru Highway that goes to Zambia will also be built.

China will have control of the port for 40 years. It provides access to 8 countries as Tanzania borders Mozambique, Malawi, Zambia, DR Congo, Burundi, Rwanda, Uganda and Kenya, with cargo uptake as far as South Sudan, The Comoro islands, Madagascar and the Seychelles. Journalist Shermax Ngahemera writes: “For China, the leading exporter in the world, it is an ideal site… China is widely involved in extraction industry in central Africa, especially in Zambia, the DR Congo and Angola. Cargo to and from those countries can therefore easily be diverted to Bagamoyo. In 2013 trade between Africa and China reached more than $200bn.”

He dismisses claims that it could have military significance, quoting a senior retired Navy General pointing out that at 14metres it could not berth a submarine. He also quoted the African Development Bank which says transporting supplies in East Africa is more expensive than in any other region, due to inefficient operations at ports in the region, road checkpoints and border controls. Shipping to Tanzania is 25% more than shipping to the larger and more efficient ports in Southern Africa.

China built the TAZARA railway linking Tanzania and Zambia in the 1960s and 1970s.

There are more details on this blog.

Ethiopia lures manufacturing with cheap power and labour costs a tenth of China’s

Low-cost manufacturing is shifting from China to Ethiopia, lured by cheap electricity and labour costs that are a tenth of China’s. Ethiopia is building a name for producing clothes, shoes and other basic goods, while also tackling transport bottlenecks. Trade and Industry minister Tadesse Haile says he wants Ethiopia to export $1.5 billion of textiles a year in 5 years, from $100 million now.
Bureaucracy and slow and poor transport links means that costs are not as low as they should be, according to an excellent report by Reuters (see “Garment-making finds new low-cost home in Ethiopia”). Ongoing power cuts and sometimes poor telecommunications, both still state monopolies, could be added to the list.

Credit: Ethiopian Radio and Television Agency (ERTA)

Credit: Ethiopian Radio and Television Agency (ERTA)

Credit: China Daily

Credit: China Daily

Reuters journalist Aaron Maasho points to Government and foreign investors building factory zones. Companies from China, India, Turkey and the Gulf are setting up manufacturing. He quotes Nara Zhou, spokeswoman for Huajian Group, a Chinese company that makes over 300,000 pairs of boots and sandals a month for retailers such as Guess from a factory near the capital: “We have to move because of manufacturing’s development in China, due to the high increase in wages and in raw materials.. Ethiopia enjoys stability, the Government is eager to industrialize and there is also the low labour cost here – a tenth compared to China.”
Ethiopia is one of Africa’s – and the world’s – fastest-growing economies. Despite the government’s socialist roots, there is no minimum wage, letting firms such as Huajian pay salaries of $50-$70 a month – still higher than the average per capita income. Desta, one of 7,500 employees at Ayka Addis Textile and Investment Group, a Turkish-owned factory 20 kilometres west of Addis Abeba, told Maasho:”Almost every young person in this locality now works here…We all struggled to make ends meet beforehand. We can now afford proper healthcare or sending a child to school.”
Ethiopia’s electricity grid offers electricity at US$0.05 per kilowatt hour, compared with $0.24 cents in neighbouring Kenya and the country is investing heavily in hydropower generation. According to Minister Tadesse: “The availability of power and the cost is cheaper than any other country in the world. We are providing power, land and labour all very cheaply.” Kenya and Uganda are also chasing investment into textiles but cannot compete on input costs against Ethiopia, where wages are 60% lower than the regional average, according to Jaswinder Bedi, Kenya-based chairman of the 27-nation African Cotton and Textile Industries Federation: “Ethiopia is a new player…They are growing and they are growing rapidly.”
The Government projects gross domestic product (GDP) growth at 11% a year, and even the 8.5% forecast for the current year 2014/5 by the International Monetary Fund is impressive. The Government is keen to attract labour-intensive investment and jobs for the 90m Ethiopians – Africa’s second biggest population – with another 2-3m born every year and population growth forecast to continue over 2% a year until 2030.
The Government says it has introduced incentives such as tax holidays and subsidized loans to investors with interest rates as low as 8%. Cheap loans are attractive as inflation is often considerably higher (it has been up to 60%), and the currency has seen steady and managed devaluation, boosting exporters and manufacturers who substitute imports.
Transport remains a bottleneck, it takes on average 44 days to import or export a container, compared to 26 for Rwanda. Amare Teklemariam, chief executive of Ayka Addis, told Reuters: “Our logistics costs are second to inputs. It affects the competitiveness of the company”. Ethiopia is 141 on a 2013 World Bank trade logistics index.
The Government says it investing an amount equivalent to two thirds of GDP into new infrastructure every year, expanding the road network to 136,000 km by next year, from just 50,000 km in 2010 and it is already working on grand plans to build 5,000 km of railway lines by 2020 from less than 800 km at the moment.
For more background see the excellent Reuters report here.

Churchill Avenue, Addis Abeba (www.tourismethiopia.gov.et)

Churchill Avenue, Addis Abeba (www.tourismethiopia.gov.et)

Kenya pledges lower domestic rates after $8.8bn bids for its $2bn Eurobonds

Nairobi National Park (credit: Kenya Tourism Board, www.magicalkenya.com)

Nairobi National Park (credit: Kenya Tourism Board, www.magicalkenya.com)

Global investors offered a record $8.8 billion in bids for Kenya’s 5- and 10-year Eurobonds this month. The country issued $0.5bn in the 5-year bond at 5.875% and $1.5bn in the 10-year at 6.875%. The resounding success is likely to encourage more African governments to speed up plans to come to international markets for credit while cheap global rates continue and appetite is high for frontier markets debt.

This is Africa’s biggest Eurobond issue to date. According to the BBC, investors from the US took about 67% of the issue and UK investors about 25%. Bond rates on Kenya’s 10-year debt in issue came down since the new issue was first announced on 16 June to 6.41% which is 381 basis points over the similarly dated US treasuries, according to Bloomberg.

President Uhuru Kenyatta was reported on Reuters telling a news conference: “By accessing these external funds, we will reduce government borrowing from the domestic markets, thereby helping drive down interest rates which should boost investment, spur economic growth, provide more employment opportunities to our people.” He described the sale as “a vote of confidence”. At a state of the economy address on 25 June he said the funds would be used prudently to fund infrastructure including transport and energy and to fund agriculture.

Cabinet secretary for the National Treasury (equivalent to Finance Minister) Henry Rotich said: “Investors were impressed with the management of our economy and perceived it to be very strong.” He said it would diversify government’s financing for development programmes. He also said the Government would come back to the markets in the next fiscal year (starting 1 July) but may consider a sukuk bond (see here for UK’s £200 million sukuk bond success) or a diaspora bond. The sovereign is also set to be a benchmark for Kenyan firms issuing corporate bonds on international markets, similar to the success of Nigeria’s sovereign issue.

Rotich said that from 8 July the Central Bank of Kenya would start setting a new reference rate for banks, the Kenya Banks Reference Rate. Banks would have to use this, although they would still be able to add risk premiums according to the creditworthiness of borrowers. This is also expected to lower interest costs and the rate would be set according to the average of the CBK’s main lending rate and the average yield on benchmark 91-day Treasury Bills every 6 months.

The Government announced its 2014/15 budget this month and forecast a budget deficit of 7.4% of gross domestic product (GDP) and local borrowing of KES190.8bn ($2.18bn) or 4.1% of GDP, according to Reuters. Macro-economist Rotich was a colleague when Kenyatta was Finance Minister and the two are working together to speed up Kenya’s economic growth to over 10%. According to a story in the Financial Times blog Beyond Brics, Rotich says Kenya will grow at 5.8% this year and 6.4% next year, however the World Bank has just cut its forecast from an earlier 5.3% forecast for this year and forecasts 4.7% for both years.

The blog cites the World Bank report: “The new projections reflect the effects of the drought, the deteriorating security situation, the low level of budget execution, and tighter global credit as the US Federal Reserve winds down its expansive monetary policy.”

The World Bank says drought has cost Kenya $12bn over the last 10 years and that foreign direct investment (FDI) is only 1% of GDP. The blog reports: “The World Bank is also increasingly preoccupied by the impact of inequality on growth and stability.” The World Bank is optimistic and is backing Kenya with a $4bn programme, double the Eurobond.

Kenya plans $43bn of infrastructure by 2017, but there are questions as to whether they get value for money in a $3.7bn deal with Chinese for new rail and rolling stock. Kenya is likely to become a middle-income country by September after re-basing because of statistical revisions.

World Bank says 4.8% growth for sub-Saharan Africa in 2012, cuts earlier forecast

The World Bank has cut its growth forecast for sub-Saharan Africa. Earlier in the year it forecast 5.2% growth overall for SSA economies in 2012, but yesterday (4 Oct) it cut this to 4.8%. World Bank said in its bi-annual Africa’s Pulse report that Africa is still vulnerable to a fragile global economy and a slowdown in China, although high commodity prices and an increase in exports from countries that have made mineral discoveries are likely to underpin growth for the rest of 2012.

Africa achieved 4.9% growth in 2011. According to the study, excluding South Africa, the continent’s biggest economy, growth is likely to hit 6% in 2012. Strong performers are expected to include countries such as Mozambique, home to some of the world’s biggest untapped natural gas reserves, and Sierra Leone which has started exporting iron ore, according to a story on Reuters. Foreign direct investment (FDI) is projected to rise to $48.7 billion by 2014 from $31bn in 2012, as investor interest in Africa soars. African exports rebounded in the first quarter of 2012, growing at an annual pace of 32%, up from the -11% pace recorded in the last quarter of 2011.

World Bank Vice-President for Africa, Makhtar Diop, said in a press release: “A third of African countries will grow at or above 6%, with some of the fastest growing ones buoyed by new mineral exports and by factors such as the return to peace in Côte d’Ivoire, as well as strong growth in countries such as Ethiopia. An important indicator of how Africa is on the move is that investor interest in the region remains strong.. despite difficult global conditions.”

Most of SSA “middle income” by 2025
The majority of sub-Saharan Africa’s 48 countries could also achieve middle-income status by 2025 though their dependency on natural resources is likely to continue in the medium term, it added. Shantayanan Devarajan, the World Bank’s chief Africa economist, said that this highlights the need for governments to spend their resource wealth wisely and focus on public investment: “Resource-rich African countries have to make the conscious choice to invest in better health, education and jobs, and less poverty for their people because it will not happen automatically when countries strike it rich,” he said.

Diop said there was an opportunity for “strengthening economic transparency and financial controls around the new discoveries, to leverage their full potential through development policies that increase economic growth, create jobs, reduce poverty, and improve health and education especially for young people and future generations, while balancing the immediate needs.”

The World Bank said that after 10 years of economic advancement, 22 of Africa’s 48 countries have officially achieved middle-income status and another 10 could reach middle-income status by 2025 if current growth trends continue. It warned that recent soaring prices for wheat and corn were a concern, after the worst U.S. drought in 50 years. Africa’s Sahel region is already suffering from higher food prices, high rates of malnutrition and recurring crisis and insecurity. Furthermore, swarms of desert locusts and the ongoing conflict in The Sahel also undermine the region’s food security, including Mali and Niger.

Development gains – poverty and child mortality down
Child mortality has also been declining. Between 2005 and 2008, for the first time the absolute number of people living on $1.25 a day fell, as poverty rates on the continent have been falling faster than one percentage point a year. With fast population growth Africa is urbanizing rapidly and 41% of Africans live in cities, with an additional 1% every 2 years. By 2033, Africa – like the rest of the world – will be a majority urban continent. The bank says this has deep implications for social and economic opportunities as urbanization and development go together and it claims that no country has ever reached high income with low urbanization.

Africa could repeat China’s long growth story– Renaissance CIO

“Africa reminds me of China back in 1999. If you missed China then, don’t do that (miss Africa) now,” is how Plamen Monovski, chief investment officer at Russia’s Renaissance Asset Managers, describes prospects for Africa. “It’s the last place in the world that is due for that rapid change and advancement.”
He was speaking in an interview with Reuters on 2 Dec. He said investors looking at China will find assets already “very discovered” and more expensive. He said African equities were trading at “exceptionally cheap” levels, while Chinese demand for natural resources and Chinese investments are boosting African business.
“The real appeal of Africa is the rise of the consumer society. Africa has got a population the size of India and consumer force as big as India,” he said. Renaissance is backing Africa’s infrastructure, consumer-related and financial sectors, as these will gain from growing prosperity within Africa, rather than commodities which depend on external growth.
The International Monetary Fund (IMF) in October said it expects 6% growth for sub-Saharan Africa in 2012, up from 5% in 2011. It is positive about the outlook because of growth in mining and other areas. Africa is seeing new entrants and efforts by the world’s largest banks and corporate, including large funds
Monovski helps manage $2.5 billion of assets. Renaissance’s funds include a sub-Saharan fund which has fallen about 17% since it was launched in October 2010 as investors pull out of risky assets in the current crisis. The fund includes South Africa’s teleco MTN Group and Nigeria’s Zenith Bank Plc among its top holdings. He joined the fund management arm of Russia’s Renaissance Capital from Blackrock last year.
He also said China will grow and will not have a “hard landing” of strong correction in the current crisis, but much growth is already priced into Chinese equities: “We want to look at other regions in the world which looked like China in the late 90s.”

BRICS stock exchanges form alliance

The securities exchanges of the “BRICS” emerging market bloc have announced a joint initiative to expose investors to the dynamic economies of the bloc members, Brazil, Russia, India, China and South Africa. China and India are among the fastest-growing major economies over the next five years, according to forecasts, and all are increasingly attractive to investors worried about stagnation on US, European and other major exchanges. The initiative was announced on 12 October, during the 51st AGM of the World Federation of Exchanges (WFE), held in Johannesburg.
The stock exchanges will start by cross-listing benchmark equity index derivatives on the boards of each of the other alliance members. Following that, the alliance will develop innovative products to track the BRICS exchanges.
This brings together Brazil’s BM&F BOVESPA stock exchange, MICEX from Russia (currently merging with RTS Exchange), Hong Kong Exchanges and Clearing Limited (HKEx) as the initial representative of China, and South Africa’s JSE Ltd (the Johannesburg Stock Exchange). The National Stock Exchange of India (NSE) and the BSE Ltd (formerly known as Bombay Stock Exchange) have signed letters of support and will join the alliance after finalizing outstanding requirements.
The seven stock exchanges represent a combined listed market capitalization of US$ 9.02 trillion (source WFE and RTS website) with listed 9,481 companies2, equity-market trading value of US$ 422 billion per month and over 18% of all exchange-listed derivative contracts traded by volume worldwide (source Futures Industry Association) as of June 2011.
Ronald Arculli, chairman of HKEx and of the WFE, says in a press statement: “Global investors are increasingly seeking exposure to leading developing markets. The close relationship of the BRICS stock exchanges is behind this initiative, through which investors worldwide will gain easier access to benchmark equity index derivatives, which will now be offered in local currency on these exchanges. These cross-listings are planned to take place by June 2012.”
He adds that this is an important moment in the history of developing countries: “The alliance enables more investors to gain exposure to the BRICS bloc of emerging economies, with its increasing economic power. From a global perspective this alliance points to the growing relevance of the BRICS economies and financial markets in the coming decade and further underlines the reason for the BRICS relationship.”
Russell Loubser, CEO of the JSE, says: “As well as being barometers of market performance, indices also form the basis of other tradeable products, including exchange-traded funds. As a logical second phase in the alliance, the exchanges have agreed to work together to develop new products for cross-listing on the respective exchanges.” These products would combine exposures to equity indices of all alliance partner exchanges. Edemir Pinto, CEO of BM&F BOVESPA, explains: “These products would then be cross-listed and traded in local currencies. They will also allow investors to gain exposure to other emerging markets through a locally listed product.”
A third phase may include product development and cooperation in additional asset classes and services.
Madhu Kannan, CEO of BSE Ltd, says: “The BRICS exchanges alliance holds great promise, as it will create avenues for Indian investors to diversify and expand into other emerging markets. It will also provide unique opportunities to investors in other BRICS nations to participate and contribute in India’s growth. BSE will actively work towards bringing world-class products to India as well as developing new products for other BRICS markets.”
Investors worldwide and those whose homes are in the BRICS economies are increasingly interested in investing in high growth emerging economies. Most of the BRICS countries are predicted to have above-average economic growth. They are going through shifts in that there is rising consumer power generated by a growing middle classes in each, which will accelerate demand.

Chinese hunt Africa mine bargains

In an article this morning (30 Sept), FT Tilt writer highlights a swift move by a state-backed Chinese company to acquire upstream mining assets in Africa. Writer Denise Law says Hong Kong-listed Minmetals Resources (MMR – www.minmetalsresources.com), part of China’s biggest metals trader, has offered C$1.3 billion ($1.25bn) for Toronto-listed Anvil Mining (www.anvilmining.com), with an all-cash offer for Anvil at C$8 per share, a 39 per cent premium to its closing price in Toronto on Thursday (29 September). The deal is subject to shareholder approval.
In April MMR bid $6.5bn for Equinox Minerals with mining assets in Saudi Arabia and Zambia but was outbid by Canada’s Barrick Gold and withdrew.
The author comments “underlining how state-backed Chinese companies were becoming increasingly reluctant to over-pay for overseas assets.” The article quotes Mark Hinsley, analyst at Foster Stockbroking in Sydney as saying the Chinese are keen to buy and current worries of slower global growth and extreme market volatility are giving them opportunities to buy up cheaper assets: “Chinese mining companies with strong balance sheets will use this opportunity to pick up assets as equity markets get pushed back and valuations fall.” He added that Africa will be an attractive destination for the Chinese, “given the supply/demand dynamics of copper and the huge exploration potential and operating cost landscape of Africa”.
Anvil’s main asset is the Kinsevere mine in DRC, which produces 60,000 tonnes of copper cathode a year. According to an MMR statement, the takeover would increase MMR’s copper output by 60%: “Anvil’s copper operations are an excellent fit with MMR’s strategy to build an upstream, international diversified base metals company. Anvil provides a sound platform and experienced management and operations team for MMR to further expand into the Central African copper belt and Southern Africa.”
A note by Foster Stockbroking says it is unlikely that a rival will emerge with a bigger bid for Anvil given that MMR’s offer is attractive. It notes how fast MMR is working to close this deal, from announcing a strategic review on 4 August to takeover bid, a total of 8 weeks. “This demonstrates the pace at which the Chinese can move to act on a strategic C$1.3bn deal. In our view, the valuation is compelling and unlikely to be trumped.”
Other Chinese mining companies looking to expand further in Africa, especially in DRC, include China Non-Ferrous Metal Mining and Jinchuan Grou as regional consolidation in the copper industry continues to play out. Hanlong Mining is also currently trying to acquire Sundance Resources, which has iron ore assets in Cameroon.