By Nick Price.
This June’s soccer World Cup will focus world attention on South Africa. Will investors’ focus on this emerging market echo that of Beijing and the Olympic Games? The Beijing Olympics highlighted Chinese strength and world cup organisers hope it will do the same for South Africa.
Estimates of just what staging a World Cup is worth vary. The consensus seems to settle on a boost to a country’s gross domestic product (GDP) of around 0.5 per cent, fuelled mainly by the spending power of 350,000-plus foreign tourists expected to descend upon the country with their wallets full of holiday spending money. The experience of past events like Olympics and previous World Cups also shows a boost to domestic consumer spending.
The positive publicity that surrounds the World Cup will generate a huge surge of goodwill towards the country and being the first African world cup finals, it is likely to rub off on the rest of the continent.
The obvious investment opportunities in the build up to the event are in the flagship infrastructure projects that have delivered new or upgraded stadiums, roads, railways airports and communications networks. Though, as the final coat of paint is now drying on most of those projects, the infrastructure opportunity for most investors has already passed.
Other sectors that stand to benefit include leisure and tourism and perhaps others such as drinks manufacturers. But even at this early stage of the year, I think most of the opportunity is priced into these stocks. Investors need to look a little harder to find the best investments while they are visiting South Africa.
In my view, the real opportunity in South Africa is bigger than the World Cup. The event will provide a much-needed shop window to the region, but the real opportunity in South Africa is the long-term secular growth trends within its borders and beyond. South Africa is in a unique position in the continent: its economy and financial markets are by far the best developed in Africa and as a result the country is very often the gateway to opportunities in the wider continent.
Africa is one of the least researched of the emerging market regions and so hides some of the best value opportunities for pioneering investors willing to do their homework. It is well known that the continent is rich in natural resources with oil and precious metals in abundance. Familiar emerging market investment arguments also apply to the continent, including consistently high GDP growth, the considerable and growing low-cost labour force and its rapid rate of productivity growth. And other trends support the region such as the continent’s fast-growing consumer sector.
Africa is one of the few regions of the world to have avoided recession in 2009 and has emerged from the financial crisis relatively unscathed. Africa’s exposure to the western developed world is shrinking and in its place are growing ties with the new global economic powerhouses such as the BRICs (Brazil, Russia, India and China). An illustration of this is that China has just displaced Germany as South Africa’s leading trading partner.
The trade in platinum is an example of how these ties have helped the country avoid the worst of the financial crisis. South Africa dominates the world’s platinum production for which the main use is auto catalytic converters. Last year’s slump in car sales would have had a greater impact on platinum miners were it not for the vast quantities they were able to sell to China’s growing platinum jewellery market. Demand will soon swing back to the car market, especially in emerging markets, and the prospects for South Africa’s platinum producers remain bright.
Some South African companies are capitalising on closer ties between Africa and the BRICs. Naspers, a media conglomerate based in Cape Town with interests in pay TV, internet and print media is one example. Its core cash generating business is pay TV in Africa from which, with limited competition, it derives 60 per cent of its profits and is growing at 8 per cent a year. But with exposure to BRICs through significant stakes in local media companies, the company’s overall revenue has grown 30 per cent year-on-year. A jewel in Naspers’ crown is a 36 per cent stake in China’s leading social networking platform, Tencents. And with Tencents dominant and growing penetration into China’s 330 million internet users, Naspers has exciting prospects.
South Africa may not have the advantage of the BRICs’ size but it is capable of using its smaller size to its advantage. Its population of less than 50 million means many nimble companies focus on flexibility and adaptability rather than sheer volume. And the country’s position as Africa’s keystone means companies are very able to exploit the vast market beyond its immediate borders.
Africa’s virtual competitive void is an opportunity for companies to provide for the continent’s growing consumer population. Shoprite is a low-cost food retailer, based in South Africa, with outlets in 17 African counties and beyond. Its coverage across the continent is vast and a staggering 60 million customers shop in its stores every month. Like Naspers, it enjoys little competition and has grown to a dominant position in its sector. Not resting on its laurels, it is expanding into other parts of Africa at a rate of 30 per cent a year. Compared to its few direct competitors, Naspers offers stronger growth credentials, as well as a stronger balance sheet.
For all the international attention South Africa will soon receive, Australians visiting the country may find other attractions should they have a spare day between matches.
* Nick Price is emerging markets portfolio manager at Fidelity International.
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