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Is South Africa for you?
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June 16, 1999: 11:51 a.m. ET
An emerging market loses leader Mandela but gains investor interest
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - It's a more muted dawn for the Rainbow Nation, as South Africa inaugurates its second democratically elected president Wednesday.
But the outlook for emerging markets in general has looked sunnier the last couple of months. That means Africa's largest economy is well positioned to bathe in the warm rays of renewed investor interest.
So should investors consider South Africa again?
"The country is potentially remarkably wealthy," said Mark Breedon, portfolio manager for Alliance Capital's Southern Africa Fund. It's a common refrain, but he finds plenty of reasons to back it up.
"The real positive in South Africa is that the country has tremendous infrastructure, is highly entrepreneurial, and the capital markets are very active."
If you're interested in emerging markets, "you can't afford to ignore it," another portfolio manager said.
But there's always a "but." Breedon cites spectacular crime rates, low productivity, high unemployment and restrictive currency-exchange policies as problems facing the African National Congress-led government.
There are several mutual funds with a strong South African orientation. South African stocks could prove tempting because they often trade at substantially lower price-earnings ratios than U.S. or U.K. equities. And South Africa often plays a significant role in more-general emerging-markets funds.
Now may be a good time to look at them, with Internet stocks off the boil and the threat of higher interest rates dampening U.S. markets.
"The opportunities are there," said Robin Grady, vice president of sub-Saharan investments for Auerbach Grayson & Co.
He has seen a recent pickup in interest for U.S. investment in the country. The election went smoothly, and now it's up to new South Africa.
"It's a case of let's see what they can deliver."
It's a brave new world after Mandela
One thing's for sure: This is no 1994. Without the euphoria when the first free elections brought Nelson Mandela to power five years ago, the new government is expected to produce results, one investment strategist said.
"I think it'll be a more realistic approach. The whole aura of Mandela has gone," said Arindam Bhattacharjee, Africa manager for Emerging Markets Investors Corp. "Now people expect to see growth."
That responsibility falls to Mandela's replacement, Thabo Mbeki, who was inaugurated as president in Pretoria Wednesday. He will give the first clues of his economic policies when he announces his cabinet Thursday.
Mbeki's election, after the ANC gained a whopping 66.4 percent of the vote earlier this month, coincides with a renewed interest in world markets. But it's poorly timed from a local economic point of view. South Africa is in the middle of a recession that started in 1998. Some of the country's blue-cap stocks lost 60 percent of their value in a matter of weeks when the economy unraveled.
Breedon's Southern Africa Fund (SOA) took a beating in 1998. He said several factors raise questions about South Africa, which saw three years of stellar growth and outside investment interest dry up last year.
Interest rates are very high, around 16 percent, as the central bank tries to curb inflation, running around 8 to 9 percent. Falling commodity prices also have hurt. One of the country's mainstays, gold, has fallen on bad times for virtually 20 years.
And the ANC may have too much power to work well with business, Breedon said. It represents an incredibly broad spectrum of political interests from right-wing democrats to communists and is relatively intolerant of new economic ideas. "The left-right fragmentation hasn't happened yet," he said.
So business-related policies aren't always that friendly. Foreign exchange controls restrict South African companies from investing more than $5 million abroad. That is an improvement from virtually nothing, but still caused five companies to look for listings on the London stock exchange, though they often keep a Johannesburg listing too.
Led by Billiton, a mining company, Anglo American, the biggest mining company in the world, and South African Breweries, a diversified holding company focused around beer, they also tend to shift management to Britain, he said.
"There's a suspicion there that these companies are only too happy to get out of South Africa," he said. Management, often predominantly white, may see itself as escaping social problems such as crime and escaping a strong affirmative-action stance in the country, he said.
But there's at least two sides to each issue
A company like Billiton has interests throughout the world, so its move doesn't surprise Grady. He said Anglo American's listing in London has actually helped the Johannesburg exchange by drawing interest there, where it accounts for a large part of trading.
Old Mutual, an insurance and savings company that will offer shares in London and Johannesburg later this month, may boost the South African economy a little as it shifts from mutual ownership and gives its policy holders shares.
And getting a listing outside the country gives companies additional capital from other countries, funding that was once beyond their range, to continue expansion worldwide.
Grady, who promotes South African stocks, said he thinks Mbeki's taking over is good news. Mbeki, 56, and who has an economics degree, has effectively been running the country for three years but will now have the clout to make things happen.
"Mandela is a great figurehead but he's not an administrator. Mbeki is an administrator. He's very hands on, no nonsense, aggressive," Grady said. Mandela, 80, is expected to remain a statesman in retirement.
For confident investors there are several interesting plays on the Johannesburg exchange, he said, where many South African blue chips trade at price-earnings ratios of 10 to 12. Steel producer Iscor Ltd., paper maker Sappi Ltd. and oil converter Sasol, which also trades on Nasdaq, are all well priced, he said.
Bhattacharjee agrees Mbeki will deliver, leading the country out of the recession it fell into in 1998. His numbers see its roughly $150 billion economy growing between 2.5 percent and 3 percent growth a year the next two to three years.
Thabo Mbeki takes the presidential oath in
Cape Town
Decent infrastructure and good management make South Africa attractive, he said. Thailand, India and Korea will have faster growth, in the 6 percent range, often because they have further to recover from recession. But settling in world economies will help South Africa, too, he said.
"It's a very geared play in commodities," with its hefty natural resources, he pointed out. That's attractive "with commodities bottomed out and prices likely to go up as demand returns in Asia."
Part of a broader focus
South Africa probably is best suited as part of a broader international focus, though, rather than as a specific country play. That depends on how speculative an investor wants to get, said Steve Bates, head of emerging markets at Fleming Asset Management.
Fleming was forced to liquidate its New South Africa Fund (NSA) under pressure from arbitrageurs in May after it suffered heavily during last year's market losses. Still, Bates said, "for those people who want a broad exposure to emerging markets, South Africa will almost certainly be part of it."
This year the Johannesburg all-stock index is up 29 percent. But that's a poorer performance than emerging markets in general, many of which are up more than 30 percent. "South Africa has done much better than the world," he said, but Indonesia, Malaysia, Korea and Russia have done better.
How tied to one economy you want to get is a personal choice, Bates said. "It will be a horses for courses thing. Some people are diversified. Others may feel confident enough to put money in South Africa directly."
The Morgan Stanley Africa Investment Fund (AFF) has a strong South African element and investments as far north as Egypt. The Calvert Group and its partner New Africa Advisers also offer a South Africa-heavy mutual fund. And Alliance Capital's Southern Africa Fund is mostly South Africa stocks.
The country's consumer price index numbers were better than expected when announced Tuesday, falling 0.2 percent in May. South Africa's central bank is widely expected to cut interest rates 1 percentage point, all of which are encouraging signs for investors.
But Bill Dinning, emerging-markets investment strategist at Merrill Lynch, said Merrill is neutral on South Africa, although the company is watching and taking "a very constructive approach," he said.
Like Australia, it stands to benefit from a general global economic pickup because it is resource-heavy, he said. "The widespread expectation that growth is picking up is good for South Africa," he said. But Merrill is more focused on Israel, Turkey and emerging countries in Asia.
Bates at Fleming said any individual investor should probably consider a diversified emerging markets fund. "The specific risk in individual countries can be very high, and South Africa is not really an exception."
But it has its advantages. The market is broad and reporting is to worldwide standards. "You can be reasonably sure you're getting a decent investment there," Bates said.
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