James Chanos, the short seller famous for spotting fraud early at failed energy company Enron, has a new target: Africa.
Chanos was talking on Wednesday at the annual Sohn Investment Conference—an afternoon event where prominent hedge fund managers make presentations about their best investment ideas.
Chanos, who runs the hedge fund Kynikos Associates, focused his talk on sub-Saharan Africa. The area used to be a darling of so-called frontier market investors. Chanos says it shouldn’t be anymore. The hedge funds manager said the continent is getting pounded by two of the biggest problems in the global economy: China and oil. Chanos has been worried about China, and began shorting oil stocks a little more than a year ago.
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In Africa, Chanos says the problem is that the growth of the commodity industries in many countries there has been fueled by investment from China. Now that China’s economy is slowing, the Chinese are pulling back investing abroad. Chanos said China’s net direct investment in Africa is falling now.
On top of that there’s oil, which Chanos said is the sole driver (or detractor, amid recent declines in oil prices) for one of sub-Saharan Africa’s biggest economies: Nigeria. On top of that there is political corruption, and at least in Nigeria, the willingness of the government to slap big fines on companies in order to help the country pay back its debts. Chanos’ bottom line: Stay away.
On South Africa: Chanos said the country is being hit on two fronts: the drop in commodity prices and corruption. He also said the country has a massive youth unemployment problem and a monstrous debt load. “The great promise of Nelson Mandela’s party is being wrecked,” said Chanos.
On Nigeria: It’s economy has no diversity, Chanos points out. It’s based on oil exports and nothing else. “Anything you think about Saudi Arabia apply here in a greater magnitude,” said Chanos. “It’s a failed state.”
On MTN Group: Chanos says the cellular phone provider that gets a majority of its business in Africa is in a lot of trouble. MTN’s (mtnoy) revenues are falling and so are its margins, says Chanos. He’s betting against the company. Chanos does say that MTN currently has profit margins that are larger than its rivals. But Chanos says that’s a negative, too. Because as they fall, as Chanos believes they will, that will erase a good portion of the company’s earnings. Anyway, Chanos says the company’s earnings are not as solid as they seem. He says the company’s cash recently has been rising much slower than its earnings, suggesting the company is having a harder time collecting on what it is owed.
The kicker: Chanos says that if it’s not bad enough that 60% of the company’s profits come from Nigeria and South Africa, the rest comes from Uganda, Sudan, Syria, and Iran—not stable markets, either. “It’s a telecom stock that Wall Street thinks will resume growth,” says Chanos. “Nope.”