Where would Indiana Jones put his pension money? Adventurous investing may be a dangerous business, but the returns if you get it right can be huge. Here's where to explore
Every now and again, MoneyWeek friend Sven Lorenz steps out of his investing comfort zone to look for what he calls "the world's most unlikely, most dangerous and, therefore, least popular investment destination". Buying where no one else dares to buy: it's an adage as old as the market itself. But, says Sven, "buying where no one else even dares to physically set foot can be even more lucrative".
Sven's been at it again over the last few weeks, and he says that this year brave investors might want to have a look at Iran. Unfortunately, looking is all most of us are ever going to be able to do. As Sven admits, "on Western capital markets, you'd be hard pressed to find any Iran-related investments".
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Still, Sven's passion for dangerous investing got us thinking and looking at a few other slightly frightening places to invest, the kind of places Indiana Jones might invest his pension money. In the 50 years up to 1999, the world only saw six days when there was no conflict going on anywhere in the world. So finding high-risk places isn't hard. However, finding ways to invest there can be very hard.
Of the danger destinations we've looked at, the Middle East is the easiest to send your cash to (remember, we're talking relatively here see below), and those who have managed it have done very well indeed in the last few years.
As a region, the Middle East produced "eight of the top ten best performing stockmarkets in the world this year", said Jim Griffin in ING Investment Weekly. The United Arab Emirates market has doubled; Jordan and Qatar's exchanges are up 90% "give or take a penny". And these rises aren't just about oil: even the markets of the "have-nots in the petroleum league tables", such as Lebanon, Jordan and Egypt (up 91% so far this year), have been soaring.
Some of these markets, such as those in Saudi Arabia (now the biggest emerging market in the world by market cap), are closed to foreign investors, but there are still ways in, sometimes via exposure from neighbouring countries.
For example, Bahrain, a tiny kingdom of just 650,000 people centrally located in the Persian Gulf, has agreements with surrounding states, said Brian Gorman on MotleyFool.com. As a result, "players operating there could have an easier time doing business elsewhere in the neighbourhood". Batelco, the national phone company of Bahrain, was one of the first companies to enter into the Iraqi cellular market following the fall of Saddam Hussein's regime, for example. Investing in the accessible markets can often give good exposure to the closed ones.
Not that the Iraqi market is closed to foreign investors any more: last year, a new stockmarket opened, even though the country didn't have a real government. The country's interim government decided that having a stock exchange would "reflect positively on all prospects of Iraqi investments". No UK funds have stepped up to the plate yet, but it is certainly a market worth keeping an eye on: it comes with a hefty risk premium, so on many measures the listed companies look cheap.
That's not the case with all such markets. Look at Egypt. Last year its stock exchange soared by 120% and this year it has already clocked up a 90% gain. The average p/e of its listed companies is now 20 times.
The bulls say that's okay because the market is expected to see fast growth. One of Egypt's sources of income is tourism. And now that Middle Eastern people seem more inclined to spend their money in their own region than in the West in part thanks to fears of money being confiscated under new anti-terrorism rules the tourism industry could get a very large boost, as long as terrorists don't keep bombing resorts.
So if you are keen to enter the high-risk, high-reward world of danger zone investing, where do you start? Below we look at some of the options, starting with Nigeria and ending with Papua New Guinea - and we also suggest some stocks to buy in their markets.
Nigeria
Nigeria may be Africa's biggest oil producer, but the country has yet to benefit from the surge in crude prices. The country's anti-corruption commission reckons that much of the $340bn the country has earned through oil exports in the last 40 years has disappeared into the pockets of corrupt officials, said Dino Mahtani in the FT. Meanwhile, while Nigeria pumps 2.4 million barrels of oil a day, it only has four refineries. As a result, Nigeria actually has to import fuel more than $2bn just last year which has been costly for the country as oil prices across the globe have surged.
So why consider investing there? Because things seem to be getting better. The IMF says that the economy should expand by some 7% this year, and is pleased that inflation is under control and foreign exchange reserves are near record levels, said the FT.
Then there's the stockmarket. Investing in part-Nigerian-owned crude companies, such as Mobile Nigeria and Total Nigeria, seems a good choice given the high oil price. But while the country may be renowned for its crude, the non-oil economy looks interesting too. It grew 7.4% in 2004, something that can only be good for consumer spending. Nigeria has a population of 130 million the biggest in Africa yet most do not yet own consumer goods, making the scope for growth huge, said Jessica Bown in The Sunday Times.
Richard Branson has spotted potential here: Nigeria's airline was liquidated in 2003, with debts of £33m. Enter Branson, who bought 49% of Nigeria's national carrier, now called Virgin Nigeria, said The Business. The move has not only brought in foreign capital and expertise to the country, but may make it an African aviation hub in the near-term. Nigeria may be risky but foreign capital is seeping in.
Vietnam
Amid all the fuss over China, few investors have paid attention to Asia's other Communist dynamo: Vietnam. Yet Vietnamese stocks are worth a look. The shift from a planned to a market economy over the past few years, involving privatisation, deregulation and admitting foreign capital, has underpinned annual GDP growth of more than 7% since 2001.
This year, the economy is expected to expand by 7.7%. Within ten years Vietnam has gone from being a food importer to the second-biggest exporter of coffee, rice and seafood. Further plus points for the economy include a young, cheap workforce; half the population is under the age of 25. All in all, Vietnam looks well placed "to grow rapidly for years", said Markus Winkler of Swiss wealth management group VGZ.
The market has been on the rise, with the VN Index 9% ahead this year after gaining more than 40% in 2004. It has been hampered by its size: since its inception five years ago, only 37 firms have listed. So the government is accelerating its privatisation programme with a view to boosting the market's capitalisation to 15% of GDP by 2010 from today's 5% of GDP. As a result, more than 200 state-owned enterprises are required to join the market this year. This should drum up interest in Vietnam among foreign investors, particularly as a punt on Vietnam won't cost them much: the market is on a 2005 p/e of under eight, while profits are expected to rise by 15% this year, and stocks yield over 5%.
On the downside, note that Vietnam is "hardly an Eden for capitalists", as Frederik Balfour puts it in BusinessWeek. Bureaucracy and the legal system are opaque, and corruption is still a problem. Faz.net points to the inefficient banking sector with its sizeable number of bad loans, while confidence in the economy could be dented if Vietnam fails to negotiate entry into the WTO this year. Still, given the economy's performance and potential, brave investors may be rewarded for betting on Vietnam before the crowds arrive.
Kazakhstan
Kazakhstan is a gold mine. It's also a copper mine, a uranium mine in fact, almost any resource you can think of and some you can't are buried in its crust. It also has enormous oil production potential, holding about 3.3% of the world's total reserves at the end of 2004. It's this oil potential that has fuelled Kazakhstan's economic boom. GDP growth averaged 10.3% a year between 2000 and 2004, according to the Economist Intelligence Unit, and is seen at around 9% this year.
Kazakhstan is the ninth largest country in the world, but its population is only about 15.1 million. Yet it benefits from "one of the most dynamic and sophisticated banking systems in the whole of the former Soviet Union", says the FT. Both Moody's and Standard & Poor's rate it as an investment-grade country. The IMF has described its fiscal regime as "a model of trade and currency openness".
So what's the catch? Well, all of this potential comes with political risk. There have recently been revolutions in Kazakhstan's former Soviet Union comrades, Kyrgyzstan, Georgia and the Ukraine. Kazakhstan's current leader, President Nazarbayev, is admired for his reformist agenda, but elections fall far short of international standards (there is another in December) and Transparency International says that corruption is on the rise. Another ill-defined area of risk is that the government has the first right to buy any assets sold in the country. Some argue that this pre-emption law might apply even to traded shares in resources companies so that, effectively, any time anyone sells shares, the Government could claim the right to buy them before investors. But with demand for commodities from oil to gold to uranium going through the roof, the rewards for those who invest in the firms that survive and succeed could be huge.
Sensible buys in crazy places
The Middle East: Investing in the Middle East is difficult. Many of the markets are closed to foreign investors, and many bar foreign companies from owning more than 50% of local businesses. However, there are some fund routes. The JP Morgan Middle East Equity fund is an open-ended investment fund listed in Luxembourg. It invests primarily in Middle Eastern companies, but can explore "to a limited extent" Morocco and Tunisia. It is currently invested in six Middle Eastern countries, including Egypt and Lebanon, and has seen returns of 63%.
Iran: Persian Gold, an Aim-listed company with its assets in Iran, floated in London earlier this summer at 25p. It then dropped back to 15p before ticking up to 17.5p when it announced "encouraging" results from exploration in northwest Iran this week. However, while it appears there is gold in the ground, drilling is still some way off. In July, Investors Chronicle warned investors to "expect the usual roller coaster ride". But what else would you expect from an early-stage exploration company operating in a dictatorship?
Nigeria: Most investors looking to Nigeria focus on the oil companies within the country, including Total Nigeria and Mobil Nigeria. Yet it's the non-oil sector within the country that has excited a number of fund managers. Glen Finegan, African analyst at First State Investments, thinks the mobile phone industry has great potential, said Jessica Bown in The Sunday Times. And he reckons the best way to get access is through the South African mobile companies, such as MTN and Telekom (both traded on the Johannesburg Stock Exchange). London-based private equity group Actis also reckons that telecoms will expand fast in the country, said Phil Davis in the FT. They've also recently bought a stake in a consumer group that trades on the Nigerian Stock Exchange, UAC of Nigeria. UACN's core business is food-focused and includes a fast-food retail outlet called Mr Bigg's. Finally, Africa bulls can invest in a two-month-old, Africa-specific fund based in South Africa, the Imara Asset Management African Opportunities fund. The fund is looking to invest in Nigeria and demands a minimum investment of $100,000, making it difficult for retail investors to buy the fund.
Vietnam: It's very hard to buy individual shares in Vietnam, so funds are the best way in. There aren't many, but one to consider is the Vietnam Opportunity fund run by Vina Capital, a Vietnamese investment bank. It is up 55% over the past year and is listed on Aim (VOF, $1.80). Another possibility is Dragon Capital's Vietnam Enterprise Investments Limited (VIETENI, $1.50), the biggest fund active in Vietnam. This closed-end fund is available on the Dublin stock exchange, but currently requires a minimum investment of $100,000.
Kazakhstan: Several firms with mining exposure are listed on the Aim market in the UK. One is Hambledon Mining, which holds the exploration rights in two areas in Kazakhstan and is making "significant progress" in confirming that the 3.5 million ounces of gold that Soviet geologists believed were present really are there, said Investors Chronicle: 1.4 million ounces has now been booked as reserves under Australian standards. But unlike many mining minnows, the company is also "making rapid progress towards production on its own account". It is hoped that by 2008 one site will be producing 105,000 ounces of gold and 140,000 of silver a year. According to broker Seymour Pierce, at today's gold price the shares are worth around 28p. Investors Chronicle rates it a risky buy. A second to consider is Frontier Mining, which works in one of the least hospitable areas of this inhospitable country. The company's Naimanjal gold mine is located in a former Soviet atomic test site, where a full 25% of all the nuclear devices ever detonated in the world were blown up between 1949 and 1989. Still, background radiation in the area is said to be back to normal and it is hoped that production will soon hit 25,000 ounces a year. Investors Chronicle reckons the shares are good value at 31p.
Papua New Guinea: a real Treasure Island
If you are really in the market for risk, you might fancy a punt on Papua New Guinea. Located just off Australia's north coast, this tiny nation comprises the eastern half of New Guinea and a scatterihng of islands east of Indonesia. Between them, the nation's 5.4million people speak 847 languages - a third of the world's known tongues.
The island of Bougainville is in the eastern-most reaches of PNG and is home to the Panguna mine, one of the world's largest open-cast copper and gold projects, which is in turn the sole asset of Australia Stock Exchange-listed Bougainville Copper. It once produced about 180,000 tonnes of copper and more than 400,000 ounces of gold a year, making it one of the world's largest single producers of both metals. However, it was closed in 1989 during a bloody conflict led by island separatists seeking independence from PNG. Leading the rebels was Francis Ona, a former mine worker who declared himself king of the island. Peace was finally declared in 2001and an autonomous government elected. But Ona and his followers holed up around the mine and declared it a no-go area.
Still, few warriors live forever, and Ona died from malaria in July. Bougainville Copper's share price shot up nearly 40%, but has since eased back to A$0.71, valuing the company at A$285m, after chairman Peter Taylor said it would cost at least A$1.3bn to reopen Panguna. Meanwhile, Bougainville's leaders have skirted around the issue, which is still hugely controversial. Still, if progress is made, the shares could soar, particularly given how much copper and gold prices have risen since the mine was shut down.
So what are the odds of the mine opening again? Not bad, said Sven Lorenz in The Profit Hunter Files. President Joseph Kabui needs to raise funds quickly to rebuild the island , and reopening the mine and taxing its products might be just the way to do it. Panguna is a pit full of money just waiting to be dug out of the ground.
