Digital solutions and private credit are transforming the financing ecosystem.

Stewards Investment Capital was a partner of the Pension Funds and Alternative Investments Conference 2024 which was held in Mauritius in February. We know that Africa will require huge foreign direct investments for the next decades. The International Financial Centre of Mauritius is already channelling FDI to African countries via alternative investments instruments such as private equity. Can we be even innovative in terms of investment solutions we offer to international investors? 

Absolutely, yes, we can be more innovative when it comes to the investment solutions we offer to international investors. The need for foreign direct investment in Africa is monumental, especially considering the continent's requirement for substantial infrastructure development and various funding initiatives, including bridges, schools, roads and telecom towers.

Many African countries are indeed eager for more capital infusion. We've witnessed some innovative structures emerge in response to this demand. For instance, there are setups where the funding company secures investment from developed markets, sometimes backed by insurance guarantees, providing a form of credit assurance to international investors. However, it's worth noting that while such structures are useful, they can also be costly and may diminish the overall capital flow into Africa, particularly in major markets, which attract the lion's share of investment.

Interestingly, smaller African countries often boast higher growth rates, yet they receive comparatively smaller investment sizes. This discrepancy highlights an important issue: the need to align the size of incoming capital with the scale of opportunities in each market. Currently, we observe a significant mismatch between the massive deals typical of developed markets, with minimum thresholds often reaching $100 million, and the actual funding requirements of African businesses, which may be as modest as $5 million. Bridging this gap is essential to ensure that investment capital is appropriately sized and efficiently distributed across various opportunities, similar to transitioning from wholesale to retail packaging.

In essence, our focus lies in innovating not just in terms of financial instruments but also in structuring investment solutions that are tailored to the unique needs and capacities of African markets. By addressing this challenge, we can maximize the impact of foreign investment, fostering sustainable growth and development across the continent.

Mauritius plays a vital role in facilitating these investments through Investment Promotion and Protection Agreements (IPPAs). These agreements provide a framework for protecting the rights of foreign investors, ensuring a stable and secure environment for investment. By leveraging IPPAs and other regulatory mechanisms, we can enhance investor confidence and further promote investment flows into Africa’s growing markets.

The Federal Reserve announced recently that it will ease monetary conditions and will proceed with three cuts of the interest rates this year. This means that United States debt market will become less attractive. Will this encourage institutional investors and pension funds to turn more to alternative investments? 

It's fascinating to observe the evolving dynamics in the markets, particularly regarding the Federal Reserve's recent announcements and their implications for investment strategies. The transparency we now receive from central bankers is indeed a relatively new phenomenon, offering investors more insight into policy decisions and their potential impact.

Regarding the anticipated interest rate cuts, there's a certain level of uncertainty inherent in interpreting the Fed's guidance. While we anticipate rate cuts if inflation remains in check, we must remain mindful of the Fed's data-dependent approach. So, whether these cuts materialize hinges on various economic factors.

If interest rates do decrease, it's logical to consider long-dated bonds as a favourable investment due to their sensitivity to interest rate movements. Additionally, Real Estate Investment Trusts (REITs) emerge as promising opportunities in a declining rate environment. However, it's essential to understand specific sectors within the REIT space. The commercial and retail sectors have experienced shifts, particularly accelerated by the changes brought about by the pandemic. The commercial and office space landscape has undergone significant shifts due to the impact of COVID-19, particularly with the widespread adoption of remote work and telecommuting. Similarly, the retail sector has experienced transformations, marked by a surge in online shopping and the growing preference for home delivery services. In contrast, sectors like warehousing and data centers are poised to benefit from structural trends, making them attractive investment options.

Although REITs and bonds are more traditional investments, alternative investments offer unique advantages, especially in managing risk and maximizing upside potential. Hedged allocations through options strategies provide a compelling approach to navigate market uncertainties while maintaining the potential for profitable outcomes.

With the easing of inflationary pressures can we expect the Bank of Mauritius to cut the Key Rate during the year? 

Well, it's an interesting question, and the assumption here is important: are we truly seeing a decline in inflationary pressures? My perspective diverges slightly; I don't foresee an immediate easing of inflation. In fact, we might be entering a prolonged phase of heightened inflation.

Several factors contribute to this scenario. The significant stimulus measures implemented by the Federal Reserve, coupled with extensive dollar printing in recent years, have already exerted inflationary pressures. Additionally, geopolitical tensions such as the Russia-Ukraine conflict, Israel-Hamas conflict and ongoing challenges like the COVID-19 pandemic have further disrupted global supply chains, leading to increased shipping and input costs.

If we observe the prices of soft commodities, for instance, we notice a rapid upward trajectory, indicating ongoing inflationary trends. We are also seeing record highs is some valautions of Developed market listed stocks and their related indices. Hence, asserting whether inflation is under control remains debatable. It's essential to remain vigilant and monitor these developments closely.

However, hypothetically speaking, if inflationary pressures were indeed to ease, it would logically follow that both the Federal Reserve and the Bank of Mauritius might consider rate cuts. But, as I mentioned, this assumption hinges on the premise of inflation showing signs of abating.

While the prospect of rate cuts in response to easing inflation is plausible, we must remain cautious and continue monitoring the inflationary landscape before drawing definitive conclusions.

Talking about the economy, there seems to be a feel-good factor among the business community in Mauritius. As for the Minister of Finance, he is confident of a GDP growth rate of 6.5% for 2024. As a financial expert, how do you see the Mauritian economy performing this year? 

I share a highly optimistic outlook for the Mauritian economy. The resilience displayed in bouncing back from challenges, such as the grey list issue affecting banks and financial services, is commendable. Mauritius has effectively remediated issues, particularly in KYC compliance, positioning itself favorably on the international stage. Moreover, the successful rebound of the tourism sector post-COVID, with increased occupancy rates, signals a promising trajectory for economic recovery.

As for the projected GDP growth rate of 6.5% for 2024, I believe it is indeed achievable, reflecting the strength and potential of Mauritius as an economic leader in the region.

Taking a broader perspective, it's essential to consider the long-term view of the Mauritian economy. Over the past few decades, Mauritius has undergone remarkable transformations, transitioning from an agriculture-based economy to a thriving hub for services, including tourism and financial services. The next phase of evolution, in my view, lies in positioning Mauritius as a fintech hub for the region.

Mauritius boasts several advantages conducive to fostering a vibrant fintech ecosystem. With its favorable time zone, multilingual workforce, and conducive living environment, it presents an attractive destination for tech entrepreneurs. Setting up a tech business in Mauritius is streamlined, requiring little more than a laptop and a reliable internet connection. By incentivizing fintech companies to employ local talent and fostering knowledge transfer, Mauritius can propel itself into the next stage of economic growth and innovation.

In addition to the positive economic outlook, it is also important to address potential risks that could impact Mauritius' economic performance. One such risk is the vulnerability posed by the Seacom cable connection, that serves as a vital link for internet connectivity in the region. As witnessed just recently, any disruptions or damages to this cable could severely impact Mauritius' digital infrastructure, affecting businesses, communication networks, and overall economic activity. As reliance on digital technologies continues to grow, safeguarding against such risks and diversifying connectivity options becomes paramount for ensuring the resilience of Mauritius' economy in an increasingly interconnected world.

The Mauritian economy is poised for continued growth and diversification, with fintech emerging as a pivotal driver of progress.

How will the good performance of the economy benefit the Mauritian financial markets? 

The positive performance of the Mauritian economy holds immense potential for its financial markets, and this optimism is rooted in the resurgence of key sectors such as textiles, tourism, financial services, and agriculture. The key lies in innovation and reinvention across these sectors to align with evolving market needs.

By revitalizing these sectors, we not only stimulate economic growth but also foster a conducive environment for investment. Increased investor confidence translates into greater capital inflows into the country, subsequently fuelling economic expansion and wealth creation.

In essence, a thriving economy serves as a catalyst for the development of robust financial markets, facilitating capital mobilization, investment diversification, and wealth accumulation. As we continue to innovate and adapt to changing market dynamics, the Mauritian financial markets stand poised to capitalize on the opportunities presented by a buoyant economy.

We have seen the effect of the good economy in the past year as the large conglomerates posted record revenues and profits in 2023. These numbers are highly reflective of how the economy is supporting the growth of the behemoth of the stock markets.

The electoral campaign is underway. Can this cause uncertainty among the business community and delay investments?

Electoral campaigns generally trigger a degree of uncertainty within the business community, and this sentiment is not unique to Mauritius. Globally, we're witnessing significant electoral events, including in the US, South Africa, and Mauritius, among others.

When comparing political dynamics, it's essential to consider the differences in economic policies and party ideologies. In Mauritius, while there may be shifts in governance, the fundamental economic policies remain relatively stable. Unlike situations in other countries where political differences may lead to drastic policy changes, Mauritius maintains a more consistent approach, with both leading parties sharing similar economic agendas.

While political change inevitably introduces a degree of risk, it's important to recognize that the risk premium associated with political transitions in Mauritius tends to be lower compared to other jurisdictions like South Africa or the USA. This relative stability provides a more favourable environment for business investment, as the likelihood of drastic policy shifts is reduced.

I am of view that while electoral campaigns may introduce some uncertainty, particularly in the short term, Mauritius offers a more predictable and stable political landscape, which ultimately mitigates the potential delays in investments often associated with political transitions relative to many other countries going through elections this year.

Having a presence in South Africa, the United States and Mauritius, Stewards Investment Capital specialises in offering bespoke investment solutions for high-net-worth individuals, pension funds and institutional investors. Tell us about your team and your expertise? 

We have a fantastic team of professionals with years of experience in tailoring niche investment solutions and managing our investors wealth. Each member brings a unique set of skills and experiences to the table, allowing us to offer truly bespoke investment solutions to our investors.

With a presence across Mauritius, South Africa, and the USA, our team is well-positioned to cater to the needs of high-net-worth individuals, pension funds, and institutional investors.

We’ve established strategic partnerships that enable us to offer bespoke solutions tailored to meet the needs of our investors ranging from conservative too risky investors. For instance, our collaboration in the private credit space with US-listed FAVO Capital in USA leverages cutting-edge fintech to drive microfinance initiatives with remarkably low default rates, particularly benefiting small and medium-sized enterprises underserved by traditional banking institutions.

Our team comprises over 140 dedicated professionals, including chartered accountants, CFAs, investment analysts, and experts in blockchain and crypto technology. We take immense pride in the accomplishments of our team members across the globe, including our CMO’s recognition on the Forbes Council and our blockchain partner’s achievements in securing Google Startup funding and advising regulatory bodies like the South African Reserve Bank.

In addition to managing institutional funds, including significant South African pension assets, our team has played a fundamental role in advising regulators worldwide on crypto and blockchain regulations, ensuring investor protection and fostering industry growth.

We also have a well-diversified and inclusive team. We embrace a wide range of perspectives, backgrounds, and skills, developing a holistic understanding of the global landscape. This diversity fuels our innovation and performance, ultimately enhancing the value we deliver to our investors.

How will your strategic partnership with US-Listed Favo Capital help your institutional clients to better diversify their investment portfolios? 

Our partnership with FAVO Capital offers institutional clients a unique avenue for diversifying their investment portfolios in 2 distinct ways.

Firstly, clients can directly invest in FAVO Capital through listed shares in the US market, providing exposure to a range of investment opportunities. Secondly, they can explore our Apex private credit opportunity, which presents a compelling option for portfolio diversification.

This investment solution offers several advantages, notably in mitigating mark-to-market volatility commonly associated with bonds. Unlike traditional bonds, private credit investments offer long-term fixed income without the fluctuations caused by changes in interest rates. The Apex, for instance, offers a competitive annual return of 12% in dollars, providing stability and consistent returns for investors.

Moreover, while many private credit options suffer from illiquidity, our partnership with FAVO Capital enables us to offer investors a unique advantage. Investors benefit from a four-year investment term with monthly liquidity opportunities, providing flexibility to exit investments as needed.

This liquidity is made possible by FAVO Capital's innovative approach, which focuses on short-dated private credit and microlending. Unlike traditional long-term private credit investments tied to specific projects like bridges or infrastructure, our model allows for the unwinding of underlying investments to provide liquidity to investors. This means investors can access their funds more readily without sacrificing the benefits of portfolio diversification and attractive interest rates.

Our strategic partnership with FAVO Capital empowers institutional clients to diversify their portfolios effectively, offering reduced mark-to-market risk, consistent returns, and the added flexibility of monthly liquidity opportunities.

Talking about the funding needs of the business community, we know that entrepreneurs are turning more to funding institutions offering digital solutions and private credit. Will these financial instruments become more popular in Mauritius going forward? 

Absolutely! The landscape of funding options for entrepreneurs is rapidly evolving, with digital solutions and private credit emerging as compelling alternatives to traditional banking channels. This trend is not just limited to global markets but is increasingly gaining traction in Mauritius as well, where we have witnessed a few companies already venturing in this activity.

In the US, the private credit space has experienced remarkable growth, evolving into a multi-trillion-dollar market. Since 2020, it has surged from USD 875 billion to a staggering USD 1.4 trillion in 2023, with projections indicating further expansion to USD 2.3 trillion by 2027. This growth underscores the attractiveness of private credit for investors seeking diversification, attractive yields, and risk mitigation.

What sets private credit apart is its ability to fill the funding gap left by traditional banking institutions, particularly in supporting entrepreneurial ventures that may not meet conventional lending criteria. This trend is likely to resonate in Mauritius and other markets, where entrepreneurs are increasingly seeking flexible and innovative financing solutions to fuel their growth.

Moreover, we've witnessed similar trends unfolding in other regions, such as East Africa, where mobile banking solutions have revolutionized the financial landscape. Countries like Kenya have led the way in embracing mobile banking, paving the way for innovative lending opportunities that transcend traditional banking models. As these trends continue to evolve, we anticipate similar advancements in Mauritius, opening up new avenues for entrepreneurs to access the funding they need to thrive.

I would say the rise of digital solutions and private credit represents a transformative shift in the funding ecosystem, offering entrepreneurs greater flexibility, accessibility, and opportunity. As these financial instruments gain momentum, we expect to see their popularity soar not only in Mauritius but across the global entrepreneurial landscape.

Talking about the funding needs of the business community, we know that entrepreneurs are turning more to funding institutions offering digital solutions and private credit. Will these financial instruments become more popular in Mauritius going forward? 

Private credit and Cryptocurrencies are 2 different topics.

First, let’s focus on private credit. The private credit market has witnessed significant growth globally, evolving into a multi-trillion-dollar industry as I mentioned above Over the past few years, we've seen a steady increase in private credit investments, with hundreds of millions added annually to the market. This growth is indicative of a broader trend where traditional lending institutions, such as banks, have tightened their lending criteria. As a result, many creditworthy borrowers have turned to private credit companies for financing solutions.

One of the key advantages of our private credit solution is its ability to offer fast, flexible loans that support businesses' growth trajectories. By leveraging fintech innovations, private credit firms can efficiently provide capital to companies, contributing to their expansion and development. Additionally, private credit investments offer investors opportunities for portfolio diversification and stability, as they are not subject to the mark-to-market volatility often associated with traditional investments.

Now, regarding cryptocurrencies, we've witnessed some significant developments in recent times. In the US, for instance, the Securities and Exchange Commission (SEC) has approved nine Bitcoin exchange-traded funds (ETFs), marking a significant milestone in mainstream acceptance. This regulatory approval has paved the way for pension funds and institutional investors, including 401(k) plans, to gain exposure to cryptocurrencies through ETFs.

One noteworthy example is the Bitcoin ETF launched by BlackRock, which gained considerable attention and investment within its initial days. Additionally, BlackRock has expressed support for the tokenization of real-world assets, signalling growing institutional interest in crypto and blockchain technology.

The emergence of tokenization for various assets, including stocks, title deeds, and digital identities, represents a paradigm shift in the financial landscape. These trends underscore the growing adoption of crypto technologies and their potential to revolutionize traditional financial systems.

We anticipate continued growth and innovation in both private credit and cryptocurrency markets. With increasing regulatory clarity and mainstream acceptance, these alternative investment solutions are poised to play a significant role in shaping the future of finance.

These asset classes are known to be risky and also very volatile particularly when it comes to cryptocurrencies. Thus, investors can become quickly nervous when the prices plummet. You’ll recall that in the wake of the demise of FTX, the price of the Bitcoin felt under 30,000 dollars. How do your portfolio managers prepare potential investors to these risks? 

On the private credit aspect, contrary to popular belief, these investments are often considered relatively safe compared to other asset classes. This is primarily due to the structured nature of private credit deals, which typically prioritize debt repayment over equity, providing an inherent equity cushion for investors. As I said earlier, private credit investments are not subject to the mark-to-market volatility seen in traditional investments like stocks and bonds. With rigorous credit analysis and adherence to strict lending criteria, investors can mitigate risks associated with private credit investments. It's worth noting that private credit has been a cornerstone of lending long before the emergence of modern financial instruments, offering a proven and reliable investment avenue.

Now, turning to cryptocurrencies, it's important to acknowledge the volatility and risk associated with this asset class. Our portfolio managers advise potential investors that cryptocurrency investments are among the highest risk options available. The extreme volatility of cryptocurrencies, particularly Bitcoin, is well-documented. However, when considering risk-adjusted returns over the long term, Bitcoin has demonstrated remarkable growth compared to other asset classes. While volatility may present challenges, it also offers opportunities for significant returns.

As the cryptocurrency market continues to mature, we anticipate increased institutional adoption and mainstream acceptance. Regulatory approvals, such as the recent authorization of Bitcoin ETFs by the SEC, are indicative of growing institutional interest. Additionally, the real-world applications of cryptocurrencies, such as tokenization and blockchain technology, hold immense potential for transforming various industries. While volatility remains a defining characteristic of the crypto market, the overall trend points towards long-term growth and opportunity.

It's essential to emphasize that our investment strategy extends beyond Bitcoin to include a diversified portfolio of the top 100 cryptocurrencies. Our investment team comprises experts from various disciplines, including software development, finance, and investment analysis, who meticulously evaluate each cryptocurrency based on its use case, reliability, security, and potential for long-term growth. Our objective is not just to follow price action but to identify and invest in projects that have the potential to become industry leaders in the future.

While private credit and cryptocurrencies carry their respective levels of risks, our portfolio managers have the duty to educate investors about these risks while also highlighting the potential rewards. By adopting a diversified approach and leveraging deep industry expertise, we aim to navigate the complexities of these markets and maximize returns for our investors.

Talking about the Bitcoin, after the meltdown of 2022, it has been picking up since the month of January after the Securities and Exchange Commission gave its green light to the creation of 11 Exchange-traded funds Bitcoin. Presently, the price of the cryptocurrency is trading at around 70,000 dollars. With the Bitcoin getting into the mainstream and being fully recognized as a financial product, can we expect more stability and less volatility going forward? 

It's true that Bitcoin has experienced significant volatility throughout its lifecycle, with notable spikes and drops in value. However, as the cryptocurrency matures, we've observed a gradual decrease in volatility, accompanied by a reduction in potential upside returns.

In the early days of Bitcoin, early adopters witnessed astronomical returns, with investments yielding thousands of percentage points in profits. However, as the market matures, the potential for such explosive growth diminishes. At our fund, for instance, we're aiming for a 500% return over the next five years, a target we believe to be achievable based on our historical performance, given we’ve been achieving about 100% per year.

The next phase of Bitcoin's evolution will likely involve increased institutional adoption and broader mainstream acceptance. As more institutional investors enter the market and regulatory clarity improves, we anticipate a more stabilized environment for Bitcoin. Some sovereign entities have already embraced Bitcoin as a reserve asset, setting a precedent for potential adoption by other countries.

Once the majority of institutional and sovereign demand is absorbed into the market, we can expect a reduction in price volatility as the supply of Bitcoin continues to increase at a diminishing rate. This gradual maturation process will likely unfold over the coming decades, leading to a more stable and predictable Bitcoin market.

It's important to note that our investment approach prioritizes a long-term perspective. As investment managers catering to institutions, pensions, and high-net-worth individuals, we focus on trends and developments that span five to ten years or more. By taking a strategic, forward-looking approach, we aim to capitalize on the long-term potential of cryptocurrencies and other emerging asset classes.

In summary, while Bitcoin may continue to experience fluctuations in the short term, we remain confident in its long-term trajectory. We are also allocated to other cryptos which we assess will even outperform Bitcoin. By navigating the evolving landscape with diligence and foresight, our objective is to deliver sustainable returns for our investors over the long term.

Do your traders use artificial intelligence and specialized trading software in order to make a better prediction of the evolution of stock prices?

We leverage advanced technology, including artificial intelligence, to enhance our trading capabilities and make informed predictions about the evolution of crypto prices.

We have developed proprietary software that utilizes AI adjacent algorithms to analyse market data and anticipate price movements. This software, developed by our technology team at Arrel Technology, plays an important role in various aspects of our investment strategy, from arbitrage and market making to liquidity provision.

One of the key functionalities of our software is its ability to facilitate seamless transactions across multiple exchanges by bridging liquidity gaps. For example, if there's a disparity in Ethereum liquidity between Bitstamp and Kraken, our software enables us to optimize liquidity flow, ensuring efficient trading execution for our clients.

In essence, our bespoke software empowers our traders with real-time insights and predictive analytics, enabling them to make well-informed decisions in dynamic market conditions.

Mauritius is known to be a very conservative country. Though we have a breed of experienced investors, high net worth individuals and institutional investors are risk-averse and prefer to invest in traditional asset classes, mainly the equity market and the debt market. Are things evolving? 

Absolutely, the investment landscape in Mauritius is evolving, albeit at a gradual pace. While traditional asset classes like land, property, equities, and debt remain popular among investors, we're witnessing a shift in attitudes, particularly among the younger generation.

Historically, Mauritians have favored investments in land and property, considering it a secure and tangible asset. This cultural inclination towards property ownership continues to be a prominent feature of the investment mindset.

However, there's a growing interest, especially among younger investors, in diversifying their portfolios and exploring international investment opportunities. Many are looking beyond traditional asset classes and venturing into offshore investments denominated in major global currencies like dollars, pounds, or euros. This strategic move not only offers exposure to diversified markets but also serves as a hedge against currency devaluation, a concern given the historical trend of the Mauritian rupee.

Moreover, the emergence of the crypto space has captured the attention of investors across generations. While some are cautiously exploring this nascent asset class, others, including established players and younger enthusiasts, are actively engaging in cryptocurrency investments.

Overall, while traditional investments still hold sway in Mauritius, there's a discernible shift towards diversification and internationalization among Mauritian investors, reflecting a broader trend towards embracing a more global perspective in investment strategies.

 When investing in traditional asset classes do you favour a stock picking approach? 

When it comes to traditional asset classes like stocks, our investment approach emphasizes precision and selectivity, rather than a blanket strategy of investing in broad market indices. While developed market indices have seen impressive gains in recent years, fueled by ample liquidity from stimulus measures, we recognize that valuations have become stretched, warranting a more discerning approach.

In the current market environment, where economic fundamentals may not fully align with stock prices, we believe in the importance of identifying industries with strong growth potential and resilience. Our focus lies on sectors such as artificial intelligence, cyber security, semi-conductors, aerospace and defence, luxury goods, low-volatility stocks, commodities and long-duration bonds, where we see promising opportunities for sustained growth and stability.

Moreover, we also believe in the prospects of cryptocurrency and blockchain-related companies. However, our investment strategy in this space differs from traditional approaches. Rather than directly investing in cryptocurrencies, we leverage options to mitigate downside risk while maximizing upside potential. For instance, investments in companies like Coinbase present an attractive proposition due to their operating leverage. When cryptocurrency prices fluctuate, the impact on companies like Coinbase is amplified, offering the potential for outsized returns.

Our investment philosophy revolves around meticulous stock picking and strategic allocation, tailored to capitalize on specific market dynamics and opportunities. By maintaining a keen focus on industries with strong fundamentals and employing innovative investment strategies, we aim to deliver optimal returns for our investors while effectively managing risk.

Disclaimer:

This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the investments or assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of Stewards Investment Capital Ltd.