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FOR some time, we have regarded Africa as a key long-term destination for emerging- and frontier-markets investment due to what we view as the continent’s combination of strong economic growth, attractive demographics and improving market access.
However, we believe a lack of investor familiarity with African investments has left many company valuations well below those paid for peers elsewhere.
South Africa differs from other markets in sub-Saharan Africa in belonging to the ranks of emerging (rather than frontier) markets due to the long-established, well-regulated and sophisticated financial markets that have developed over its lengthy history as a world leader in many branches of mining.
In our opinion, the South African market plays an invaluable role in pan-African investments, providing liquidity, a number of attractive direct investments and many opportunities to gain indirect exposure to otherwise inaccessible African markets.
South Africa has suffered from somewhat downbeat news flow in recent months. Mining and agricultural sector output has been muted, not helped by weak prices for many commodities, which in turn has pressured domestic economic growth rates.
At the same time, South Africa has seen currency weakness, just like a number of other emerging markets requiring foreign investment inflows to offset a persistent current account deficit.
The adverse impact on consumer incomes already affected by high levels of unemployment has made life difficult for domestic businesses. Meanwhile, we believe labour relations, particularly in the mining industry, appear strained, while radical voices within the governing African National Congress party appear to be growing louder.
We, however, feel that much of the adverse news is short term in nature. Signs of economic recovery in the developed world, as well as improving data from China, have already prompted a revival in commodity markets that we believe will likely feed into mining company earnings.
The labour unrest affecting the mining industry has an element of posturing about it, in our view, with rival miners’ trade unions competing for membership through the aggressiveness of their wage demands. We believe that actual settlements are running at little more than the rate of inflation.
Rand depreciation, meanwhile, has positive as well as negative effects, with pressures on domestic businesses balanced by improvements in the position of exporters.
Manufacturing activity has already shown signs of benefiting from this new-found competitiveness, with recent economic releases showing signs of an uptick in activity. In addition, a cheap currency provides a notable additional impetus to South Africa’s already substantial attractions as a tourist destination.
In such circumstances, our long-standing investment philosophy of seeking to identify situations in which short-term sentiment has uncovered long-term value makes South Africa an intriguing proposition for us.
In addition, many South African businesses have attributes beyond their domestic qualities, with some, including brewing and mining giants, having a global reach.
Interesting to us as emerging-market investors is also a block of South African businesses that has utilized management and technological expertise to build positions in African markets and industries that might otherwise be hard to access.
Mining businesses established in South Africa but seeking new metals and minerals reserves to develop are an obvious group, in our view, and one accompanied by a considerable retinue of mining services businesses such as equipment hire operations.
Other South African companies are seeking to service a growing demand for consumer products as economic growth across the continent puts disposable income in the pockets of consumers. South African businesses are major players in telecommunications markets across the African continent.
Retail businesses have also been active in establishing thriving operations in African markets outside South Africa, as have some financial companies.
While we do try to seek direct investments in African frontier markets where available, these indirect holdings provide some access to the upside arising from early involvement in fast-growing, underdeveloped markets while also giving access to a liquid and well-regulated stock exchange.
For these reasons, we think South Africa, the continent’s regional superpower, is not only an attractive investment destination in its own right, but also a key jumping-off point for exposure to the rest of the continent.
*Mark Mobius is the executive chairperson of Templeton Emerging Markets Group.
However, we believe a lack of investor familiarity with African investments has left many company valuations well below those paid for peers elsewhere.
South Africa differs from other markets in sub-Saharan Africa in belonging to the ranks of emerging (rather than frontier) markets due to the long-established, well-regulated and sophisticated financial markets that have developed over its lengthy history as a world leader in many branches of mining.
In our opinion, the South African market plays an invaluable role in pan-African investments, providing liquidity, a number of attractive direct investments and many opportunities to gain indirect exposure to otherwise inaccessible African markets.
South Africa has suffered from somewhat downbeat news flow in recent months. Mining and agricultural sector output has been muted, not helped by weak prices for many commodities, which in turn has pressured domestic economic growth rates.
At the same time, South Africa has seen currency weakness, just like a number of other emerging markets requiring foreign investment inflows to offset a persistent current account deficit.
The adverse impact on consumer incomes already affected by high levels of unemployment has made life difficult for domestic businesses. Meanwhile, we believe labour relations, particularly in the mining industry, appear strained, while radical voices within the governing African National Congress party appear to be growing louder.
We, however, feel that much of the adverse news is short term in nature. Signs of economic recovery in the developed world, as well as improving data from China, have already prompted a revival in commodity markets that we believe will likely feed into mining company earnings.
The labour unrest affecting the mining industry has an element of posturing about it, in our view, with rival miners’ trade unions competing for membership through the aggressiveness of their wage demands. We believe that actual settlements are running at little more than the rate of inflation.
Rand depreciation, meanwhile, has positive as well as negative effects, with pressures on domestic businesses balanced by improvements in the position of exporters.
Manufacturing activity has already shown signs of benefiting from this new-found competitiveness, with recent economic releases showing signs of an uptick in activity. In addition, a cheap currency provides a notable additional impetus to South Africa’s already substantial attractions as a tourist destination.
In such circumstances, our long-standing investment philosophy of seeking to identify situations in which short-term sentiment has uncovered long-term value makes South Africa an intriguing proposition for us.
In addition, many South African businesses have attributes beyond their domestic qualities, with some, including brewing and mining giants, having a global reach.
Interesting to us as emerging-market investors is also a block of South African businesses that has utilized management and technological expertise to build positions in African markets and industries that might otherwise be hard to access.
Mining businesses established in South Africa but seeking new metals and minerals reserves to develop are an obvious group, in our view, and one accompanied by a considerable retinue of mining services businesses such as equipment hire operations.
Other South African companies are seeking to service a growing demand for consumer products as economic growth across the continent puts disposable income in the pockets of consumers. South African businesses are major players in telecommunications markets across the African continent.
Retail businesses have also been active in establishing thriving operations in African markets outside South Africa, as have some financial companies.
While we do try to seek direct investments in African frontier markets where available, these indirect holdings provide some access to the upside arising from early involvement in fast-growing, underdeveloped markets while also giving access to a liquid and well-regulated stock exchange.
For these reasons, we think South Africa, the continent’s regional superpower, is not only an attractive investment destination in its own right, but also a key jumping-off point for exposure to the rest of the continent.
*Mark Mobius is the executive chairperson of Templeton Emerging Markets Group.
