Can you Bank with the Rothschilds in Africa?

African Bank Teaser from Yiannis Mostrous solved

By Travis Johnson, Stock Gumshoe, January 12, 2011

We’re mired in snow emergency up here in Massachusetts, so today’s article is a rerun — this was originally published as part of the Friday File for the Stock Gumshoe Irregulars on November 12. It has not been revised or updated except to update the disclosure information at the bottom. As far as I know this teaser ad is not currently in active circulation, though my opinion about the stock and theme remains the same — and the stock teased is relatively unchanged from early November.

The folks at KCI must have a thing for the Rothschild family, because this is the second time they’ve built a teaser around following the investment moves of the Rothschilds to build your own fortune. Last time it was Elliott Gue, speculating that the Rothschilds would be moving into deepwater drilling services and taking over Seadrill (at least, that’s the conclusion I reached from his teaser), and of course, I’d love to agree with him since I’m a Seadrill shareholder and that was the first stock I profiled for the Irregulars a couple years ago (I don’t agree, but I’d love to — and if the Rothschilds want my shares, they can buy ’em for the right price).

This time, though, we’re told by Yiannis Mostrous that the Rothschilds are “going to Africa,” and that you can follow their money to make some of your own … if only you’ll first subscribe to his Silk Road Investor so he can show you the signposts.

Africa makes for some great investing stories, and this teaser is no different:

“The Last Great Investment Opportunity!

“Kings, pharaohs, sultans and Alexander the Great dared to dream big here. Invest with the Rothschilds today and take your place among the lions of Africa. You’ll tell and retell the story of raking in millions on this trade for years to come!”

Sounds exciting, right? Well, it gets better — as with most Africa stories these days, it also involves the Chinese, friends to any African despot with access to a copper mine (OK, that’s a cheap shot — they’re not doing much compared to what other colonial superpowers did in their pre-politically incorrect years):

“At the height of the financial crisis in 2008, the global investment community was preoccupied with the subprime debacle and resulting collapse of the U.S. banking industry.

“The Rothschild family seized the opportunity to act on their African ambitions. There was a top-secret meeting in Beijing. A deal was cut with Chinese government officials.

“The financial maneuvering was cleverly disguised as an investment by the Chinese government. As the Bear Stearns collapse dominated world headlines, a state-owned Chinese bank took a large stake in an African bank.

“While the global financial markets were melting down and investors the world over were wringing their hands, Rothschild agents worked through the Chinese government and positioned the family to make another trillion dollars.”

And Mostrous is a bit pushier about it, but I basically agree with him when he says that …

“Africa is the single greatest frontier and emerging market investment opportunity on Earth in 2011.”

Which means that I’m interested to find out how he thinks we should profit from Africa — I’ve already told you what I think the most interesting idea in Africa is for small investors right now (that’s Lonrho, which is now also one of my largest personal holdings), but it’s clear that he’s looking at something a bit bigger, which isn’t necessarily a bad idea (particularly for those who are somewhat more risk-averse).

So what is it? Here’s what he says about this investment:

“After all my research on Africa, there is one investment opportunity that you simply cannot afford to miss…

“Invest with the Rothschild banking dynasty and you’ll rake in more profits on one monster trade than all the money you’ve ever earned before!

“After carefully examining over 467 companies in Africa, I’ve come up with a short list of 1 super investment. This African bank is a investment model that rests on secure pillars: political stability, rule of law, property rights, access to capital and public investment in education, health and social services.

“This African bank would be a GREAT investment even if the Rothschild banking dynasty were not quietly pulling the strings behind the scenes to conquer Africa!

“When the Rothschild family engages in classified meetings with the Chinese government, and soon after one of the four largest state-owned banks in China acquires a huge equity stake in an African bank, it’s time to sit up and take notice.

“You have a golden opportunity to buy this top-secret bank stock now, before it starts gapping higher on the charts. It’s a perfectly safe, secure investment in Africa that will double or triple your investment capital.

“’Probably the best financial systems of any emerging market are in South Africa,’ says Jan Randolph, head of sovereign risk at Global Insight. ‘Their banks are as good as ours, and their capital markets are as developed as anywhere else in the West or Japan.’”

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So … not a lot of clues, but that bit about the large Chinese bank taking an equity stake is the key for confirming that this must be:

Standard Bank, the largest bank in South Africa (SBK in Johannesburg, SBGOY for the ADR on the pink sheets in the US). Volume is light for the pink sheets shares, but it does trade everyday and track the South African price pretty well. It’s also listed on the Namibian exchange, but it’s even less likely that your broker will let you trade directly there.

There are a few general strategies for investing in emerging markets, but one of the most popular standbys over the years has been to buy the best or biggest bank, the biggest telecom provider, and whatever the strongest commodity play in the country might be (whether that’s palm oil in Southeast Asia, oil in Uganda, iron ore in Brazil, Steel in South Korea, etc.) to get exposure to a pretty good approximation of the economy. And Africa often gets lumped in as one market, despite it’s 50 or so different countries, so certainly buying the South African banks — by far the strongest and most trusted on the continent, on average — has been a strategy for playing the Africa investment game, as has the South African ETF or some of the larger individual stocks like the wireless operator MTN, Coal-to-gas company Sasol, the media conglomerate Naspers that’s built on a foundation of South African cable TV and newspapers but is expanding globally, or the South African gold and coal miners.

Still, South Africa is a very different market — and a much more mature one — than the “frontier” markets of the much less developed subsaharan African nations … as an investor the shorthand is to think of three broad categories in Africa: the Mediterranean nations like Morocco, Algeria, Egypt and Libya that are considered part of the Arab world and have Euro-Arab development traditions and cultures from centuries of Mediterranean trade; the subsaharan nations that used to be called “black Africa” and are really cut off from North Africa by that sparsely populated desert, which includes everything from the Gulf of Guinea countries like Ivory Coast and Nigeria (by far the most populous country in Africa, with more people than Russia or Japan), down to Angola, the Democratic Republic of the Congo (another huge African country), and over to Tanzania and the island of Madagascar; and down that the bottom we have the most developed core of subsaharan Africa, South Africa, the financial and business center (though Nigerians may disagree).

Of course, that ignores all the different histories of colonization by different European powers, the various different kinds of mineral wealth and political struggle, and washes over some distinctions that would probably help us invest profitably if we understood them better (that would take a full course in African society or a long visit, neither of which I’ve done). And there are plenty of failed states and war-torn areas like Somalia and the Sudan (which is the biggest country by land mass in Africa). South Africa has often been considered the safest, most stolid investment in the continent (perhaps excluding Egypt, which many people think of as the bookend on the other end of the continent as the other most developed country) — but it also hasn’t shown the same kind of outlandish growth as the frontier nations (or even the BRIC nations that are the giant emerging growth darlings, for that matter). Perhaps that’s partly a result of their relatively advanced economy that should naturally grow more slowly, and partly due to the huge dislocation of their political transformation and relatively recent post-apartheid re-entry into the community of nations (along with other challenges, more recently including plenty of labor and power-supply troubles for some of their large, established industries like mining).

But still, if a South African bank is doing well at building a pan African business, that would be appealing — after all, the growth in subsaharan Africa is truly incredible. The Republic of Congo, Angola, Botswana and Liberia are all growing faster than China right now, and countries like Niger, Mauritania, and Ghana are expected to continue chart-topping economic growth in the next few years (as in mid-teens economic growth). True, they’re starting from a lower base than many countries, and many of these economies rely heavily on commodity exports (metals, agricultural commodities, and oil) so a commodity crash would put the kibosh on a lot of that growth, but Africa has to develop: it’s also almost certainly going to be the among the regions where world population grows the fastest over the coming decade — and it’s also, despite endemic poverty, where many of the world’s multinational corporations see their hope for future growth staying alive (like Coca Cola, there was a good article last month in Business Week on Coke’s Africa strategy — with one interesting note being that many of their customers drink “at the bar” because they can’t afford the deposit on the glass bottles).

So how is Standard Bank doing?

Well, they say they are the largest bank in South Africa, and the one with the largest international presence — they have operations in about 35 countries around the world, half of them in Africa but also including strategic positions in Turkey, Russia and Argentina, among other markets, so that’s pretty impressive. And they do have huge numbers of products targeted at a continent that is largely “unbanked”, so as consumers grow more comfortable with traditional banking services like checking accounts and credit cards, and wealthy enough to need them, they may have some potential on that level. But probably the real potential for growth is in their investment banking and commercial banking work, helping to fund the development of underdeveloped nations — just as the Rothschild’s did in the 1800s as they financed many of the colonial city-building efforts in Africa through banks like Standard Bank (though I don’t know if they actually had a hand in this specific bank — it was started in South Africa when it was the small Cape Colony and raised money from the UK, later became part of Standard Chartered Bank, and then went independent again and started rebuilding an African branch and business network about 20-25 years ago).

And that’s part of why the Chinese investment in Standard Bank is notable, though I don’t know if the Rothschilds had anything to do with that, either (they certainly could have either formally or informally, the Rothschild investment bank is one of the world’s largest and does do a lot of work in China). The Industrial and Commercial Bank of China bought 20% of Standard Bank back in the fall of 2007, just as China fever was hitting one of its peaks (they paid about $5.5 billion). Ignoring the impact of the fluctuating South African Rand (which collapsed in the financial crisis but has now recovered to pretty near 2007 levels vs. the US dollar), that stake has probably grown in value by about 20%. I would assume that China is in this for the long haul, though, as the deal was as much strategic as economic to begin with (China is investing hugely in Africa, and Standard Bank is also facilitating Sino-African transactions in Yuan, which is a Chinese priority as they try to move world trade away from its dependence on the dollar).

Standard Bank currently trades for about 12X earnings, with a dividend yield of about 3.5% — so that sounds perfectly reasonable, and similar to peers. Their credit rating (assuming you trust those at all) is about the same as the sovereign rating for South Africa, so no one is expecting anything super-scary — which makes sense, as Standard is quite huge with a market cap of just under $25 billion.

There isn’t a universal consensus that Standard Bank or its major competitors are good bets, of course — the group was downgraded to sell recently by a South African brokerage on concerns that growth will be tepid this year and may be nonexistent for a few years, and certainly I think even those who are enthusiastic about investing in Africa (myself included) would concede that growth is unlikely to be even or consistent — and that many of those who were enthused about investing in Africa in the past have certainly been burned. The South African economy, which despite the growing emerging market presence is still the most important for Standard Bank, is not necessarily going gangbusters right now per recent data releases on industrial output.

So I don’t know if Mostrous will be right, but I would agree that this is a reasonable bet on growth across subsaharan Africa, and that their connections with the rest of the world should also help as global trade focuses more and more on Africa and it’s natural resources and large population centers.

If you read the teaser ad you’ll see Yiannis Mostrous offering his bona fides by way of telling you what great picks he’s made in the past. I can confirm that one of the other stocks that Mostrous teased earlier this year as the “next McDonald’s” did indeed more than double after he touted it — that’s because I wrote about the teaser at the time, and the stock, Jollibee, is up quite impressively in the six months or so since then. Not that his ability to pick out an appealing Filipino fast food chain is necessarily evidence that he can pick the best large cap African bank, but since I occasionally make fun of folks for making ridiculous claims it seemed only fair to give him credit for that one.

(That “Next McDonald’s” marketing must have worked really well, because his publisher followed up with a teaser for the “Next Coca Cola” in August— that stock is up, too, though it’s far larger and is only up by a bit less than 10%.)

So there you have it — I still prefer Lonrho myself as a more direct and leveraged play on growth in agriculture, mining and energy, infrastructure growth and travel in Africa (I profiled Lonrho as an “Idea of the Month” about a year ago in this space), but I’d certainly concede that Standard Bank is likely to be far less volatile an investment while still getting exposure to the expected growth in the region. For what it’s worth, Lonrho has spiked recently and just about doubled over the last year, so it now may more closely approximate fair value, but they’re also just hitting their stride in terms of what I think will be sustainable profitability, particularly with their agricultural operations but also with Fly540 and the Luba Freeport — so they’re not necessarily cheap, but with the possibility that they’ll upgrade their listing to a larger exchange (possibly moving to a LSE listing from AIM) or even move their primary listing to Hong Kong in the near future, I wouldn’t be surprised if there’s a catalyst for moving the shares up in the next couple months. Still, for me Lonrho is at least a 5-10 year story if I continue to like management’s performance, and I can as easily see the shares fall off by 50% if investors “de-risk” and flee from frontier markets — in which case Standard Bank or the big South African names (or the South African ETF, EZA) would probably be safer bets for African exposure.

Full disclosure: I continue to hold Lonrho as one of my largest personal positions and I also hold shares in Seadrill. I do not own any of the other stocks mentioned above and will not trade in any company mentioned for at least three days.