African Banks: 1920 vs. 2018

I’m working through “Negro With a Hat: The Rise and Fall of Marcus Garvey,” and it’s fascinating to learn more about life in Jamaica during colonial times and Garvey’s experience trekking to Europe. While living in London, Garvey got a job at The African Times and Orient Reviewa paper published by Dusé Mohamed Ali. The paper carved out a reputation as unabashedly African nationalistic.

Ali was ambitious and launched a number of other initiatives outside of the paper. One of those in 1920 was an attempt to set up an independent bank in Ghana that would compete against European banks in West Africa. The venture wasn’t successful and got me thinking about Nigeria’s United Bank for Africa (UBA). This year, they got approval from Britain’s Prudential Regulation Authority to operate as a wholesale bank in Britain. The bank plans to use this approval facilitate trade finance deals in African markets. In 2018, UBA is the only African bank with this approval. That shouldn’t be the case and is a reminder of how much work there is still to do.

As a Third Grader, I Broke Up a Fight Between Two Fifth Graders

Credit: CBS

And thankfully, Mark Mobius aka Lex Luthor is breaking up the fight going on between emerging and developed markets on US Federal Reserve Bank guidance rumors. The dance has gone something like this:

Emerging Markets: Sigh, the Fed is being pretty tight with it’s currency. Come on coach, let emerging markets spin!

Ben Bernanke: Policy accommodations are warranted. You get cash! You get cash! You get cash! Everybody gets cash!

Emerging Markets: Invest in [Insert Emerging Market country]. Check out our growing middle class, enormous investment returns, and sandy beaches.

Ben Bernanke: My arm is getting a little tired from throwing these hundreds, so I’m thinking I’m going to wrap this thing up a little early.

Chorus aka Traders: Sell!

Emerging Markets: Wait! Hold up! Oh snaps, what are we going to do? (Christine LaGarde’s name pops up on the cellphone)

Jim O’Neill: Why are you crying? Quit being punks. Step up your financial market game. Give me one good reason why US currency continues to be more important to your economy than your currency is to developed markets. (Silence) That’s what I thought. Quit crying.

Richard Koo: Welp, that’s what you get for not making some hard decisions and preventing US currency from impacting your economy so heavily.

Mark Mobius aka Lex Luthor: Hey. Everybody calm down. Looking historically, emerging markets are killing the game with the returns they are generating for investors. Their foreign exchange reserves are larger than those of developed markets. And, their debt-to-GDP ratios are typically lower. That’s attractive, and if emerging markets keep it up, will remain so for a while. A bump in the road here and there will only make them stronger. Furthermore, there’s still a ton of liquidity out there. Ben has been throwing dollars Lil Wayne style. On another note, do you like my creme suits?

My Take

Mark Mobius is spot on. Involving oneself in emerging markets is a long-term play.  Because of that, traders looking for quick hits are going to find themselves in panic-mode more often than they would like – especially if they have not done thorough research. Commit to the long-term, do the homework, don’t panic, and investors won’t regret the experience.

Emerging market policy makers have a tough line to walk. Consumers in emerging markets are working hard to be able to afford Nando’s (delicious stuff). Policy makers in efforts to create a virtuous cycle of FDI are trying to put consumers in a position to meet their aspirational tastes. At the same time, emerging markets must instill the discipline necessary to position their citizens for Singapore-like sustainable growth. That takes hard teamwork from all stakeholders. Done well, I anticipate having fewer restless nights pondering why Africa is so far back.

I agree with Jim O’Neill’s challenge to emerging markets to develop their financial markets and reduce their dependence on US currency.  A few years ago, Nigeria’s Central Bank shifted a portions of its foreign exchange reserve to include Chinese Renminbi.  Will we see other Central Banks doing more of this? The newly minted East African Exchange and the continued work of the Asset Management Corporation of Nigeria are examples of African countries taking steps to strengthen their financial markets.

The Work Continues

The emerging market sell-off that has been going on for the past few months has been frustrating to watch. It must reinforce the urgency with which emerging market policy makers create environments for wealth creation locally and globally. The investors who conduct country-specific research rather than look for key words will continue to do well. At the end of the day, folks are going to make money.