Now that we have taken a look at key differences between emerging and developed markets, risk factors & considerations, and reasons to invest in emerging markets, we will turn our attention to Kenya as one specific example where we may find not only economic benefits but the potential to improve the quality of life for a large number of people via innovation and disruption
Overview (covered in a prior article, but included for further context and reader convenience)
"I skate to where the puck will be, not where it has been" - Wayne Gretzky
Our timing is fortuitous here, as just one example of the potential in emerging markets, David Hunt, the CEO of $1T+ asset manager PGIM was featured on Bloomberg TV stating that while they are currently over weighted in U.S. assets for the short-term, they are concurrently invested in emerging markets, and in fact if he was looking at the next 5-10 years, growth opportunities will come predominantly from the latter (interview on "Bloomberg Markets; The Close, 18 October 2019).
Similarly, we feel this analogy applies very well as we consider emerging markets, as they may offer the combination of strong growth and under discovered opportunities providing larger upside than developed markets, making them an investment opportunity well worth considering.
Growth rates: In line with Mr. Gretzky's and Mr. Hunt's quotes in our overview, emerging markets appear to be "where the puck will be", and thus a very positive factor in favor of emerging markets that is really at the heart of our analysis, as we want to be where the best opportunities are and in areas that offer outsized growth potential.
The most recent IMF data further validates this, with emerging market growth at 4.5% (2018) and forecasted growth of 4.1% and 4.7%, compared to a world growth rate of 3.8% and forecasted growth of 3.2% and 3.5%, and advanced economies growth rate of 2.2% and forecasted growth of 1.9% and 1.7%. Naturally, emerging countries can have faster growth as they catch up with more developed countries, but with their growth slowing as they develop (as an analogy, a company with $1MM in revenue needs an incremental $1MM to double revenue, but one with $5MM needs an incremental $5MM to accomplish the same) Countries can rapidly transition from the "next big thing" to being firmly established as leading economies, and the IMF data shows that emerging markets have been a major driver of overall world economic growth given that advanced economies have lagged overall growth.
Broader macroeconomic and social trends: Closely related to the GDP growth rates, emerging markets tend to have favorable population growth rates. Consumer demand makes up the largest driver of GDP growth in both developed & emerging economies, and strong growth rates in emerging markets offer the potential for a larger workforce and consumer base that can drive outsized GDP growth. From a brief look at the World Bank data , the world has a cumulative 1.1% population growth, but with OECD nations, North America, and Asia Pacific all below 1% (with some regions facing negative growth), and growth instead coming from Africa, highly indebted countries, and least developed (UN definition) regions, all with growth over 2%.
Kenya: A potential rising star?
With Africa as a major driver of both population and GDP growth, it makes sense to consider African markets as an area of interest, and we believe one of the Continent's largest, Kenya (we do not believe Kenya to be the sole opportunity, but rather one example), offers great potential for economic growth that can also serve as a driver of positive societal benefits to its citizens .
One item where we are particularly excited about is Kenya's excellent progress in life expectancy of its citizens. With the country moving from an average of 50.9 years in 2000 to a current level of 69.9 years, an impressive 40% increase. The social benefits are readily apparent and will help the citizens live better lives, and while we certainly would not want to put economic benefits on the same tier as human life, there should be also be some corresponding benefits to the country's economy via citizens having longer careers, more stability, and the increased knowledge transfer as more experienced workers pass their accumulated knowledge on to newer workers.
Indeed, Kenya has seen excellent economic returns during this period, between 2000-present, Kenya, has increased its nominal GDP from $12.71B to $87.9B, an impressive 7x growth, and its PPP GDP from $36.6B to $190.3B, a nearly six fold increase.
Moving on to some of the other criteria we had examined before, we find predominantly positive trends for Kenya both in terms of potential risk factors and areas where emerging markets may differ from more developed markets.
Investment: As discussed, investment is a very important criteria for developing economies, as it provides both the financial (infrastructure, manufacturing, etc.) and human (education, specialized training, etc.) capital necessary to grow. Kenya's investment has increased slightly from 18% of GDP in 2000 to 21% of GDP in 2019; however, we should note that Kenya's GDP has grown significantly, thus making the overall investment very significant since it has remained at a consistent proportion of a larger GDP. Kenya's World Bank-linked IBRD/IDA investments have increased from $40MM in 1999 to $850MM in 2018, indicating strong foreign investment yet not at a level that is averse relative to GDP in terms of being over-leveraged.
Political: As mentioned in our prior discussion, politics are important for obvious reasons, and we believe Kenya to be on the upswing going forward despite some very legitimate prior concerns.
Diversification of the economy: As we discussed earlier, economic diversification can be important as countries transition from emerging to developed economies, as concentrated economies can be more vulnerable to external factors outside of the country's control, whereas diversified economies can provide a cushion against external or cyclical pullbacks. Kenya's economy is mixed in this context, with a heavy concentration in agriculture, and strong concentrations in services an& industry; however, the country is well diversified within each of these sectors, and most are relatively stable, necessary commodities (as compared to something like an oil-dependent economy). While we would prefer further diversification, the country's net import/export balance appears manageable for a developing economy.
GINI: This can be a useful metric to gauge economic inequality within a country, with a lower GINI indicating less inequality, likely lower poverty rates, and a strong middle class that can help drive growth. Kenya's GINI index of 40.8 is nearly in the middle of the latest World Bank data; nearly identical to the U.S. index of 41.5; in line with the largest African economy, Nigeria at 43.0; and toward the lower (where lower = less inequality) end of Africa overall, thus being a favorable indicator.
Deficit/GDP: Kenya's deficit/GDP is a concern, at -6.7% of GDP (our prior discussion mentioned 4% as being a threshold to closely watch) and ranking toward the bottom of countries listed in the CIA's World Factbook. The country's strong recent GDP growth is a major positive, as we would be far more concerned with high deficits in a flat or slowing economy, but this is nonetheless something to keep an eye on.
Debt: Kenya's debt/GDP and external debt are both toward the middle of the pack, as one might expect for a growing economy - not a value driver, but nor a potential concern like corruption or high deficit/GDP ratios.
Innovation: This could easily be the topic of its own paper and one we may explore in more depth later, but a few articles worth considering that validate Kenya's great progress and ongoing potential include:
https://vc4a.com/blog/2016/04/25/kenya-africas-silicon-valley-epicentre-of-innovation/ https://www.nation.co.ke/newsplex/innovationleaders/2718262-4280194-12e0s8mz/index.html https://share.america.gov/kenya-africas-innovation-hub/ https://www.nation.co.ke/newsplex/innovation/2718262-5273578-i0x94i/index.html
In summary, while Kenya has its share of challenges, just like any - both emerging and developed -economy, we are very excited about the country's potential to say the least. The nation's impressive gains in both life expectancy and GDP speak for themselves and show that economic gains and social gains are complementary rather than exclusive. While the prior political situation raised concerns, the devolution of power to the state level may help, and the deficit/GDP that may otherwise be a concern is offset by the impressive GDP growth, lack of socioeconomic stratification, and perhaps most importantly booming innovative ecosystem that may lay a foundation for strong future growth. While still early, Kenya is a "story' we believe is still in the early chapters, and one we are bullish on.
Sources
Special source/reference credit to the CFA Institute's "Capital Market Expectations", "Managing Investment Portfolios: A Dynamic Process", and "Asset Allocation and Related Decisions in Portfolio Management" along with :Larry Swedrow and Jared Kizer's "The Only Guide to Alternative investments You'll Ever Need" (Chapter 4) for broad reference points within, and which I strongly recommend for a more detailed analysis than this overview; analysis author's own