The Case for Investing in South Africa

South Africa may not be getting much good press of late, but Jan Schalkwijk, CFA, of San Diego-based Africa Capital Group believes its stock market remains promising. He explains why in this guest post. 

South Africa offers investors frontier markets-type growth, but with more liquidity, more mature capital markets, greater data richness and greater transparency. Although markets such as Nigeria, Kenya, and Ghana hold great potential for sustained high growth, South Africa is the most mature stock market on the continent.

It comprises nearly 90% of total Sub-Saharan Africa market capitalization, and its listed companies will participate in the upside of less mature markets, making it an ideal entry point for US investors who want to allocate to Africa.

Photo by Paul Watson

Gateway to Africa

As capital controls are relaxed through tax treaties and lower barriers to direct foreign investment and profit repatriation, new capital can flow more easily into Africa. South Africa is the primary beneficiary of this development. This should greatly increase intra-African trade, which is currently only 10% of total African trade. By comparison intra-European trade as a percentage of total European trade is 60% and similar figures for the United States and Asia are 40% and 30% respectively.

As such the potential for increased trade within Africa cannot be overstated, and South Africa, as the most mature African market, is in a unique position to benefit from this increased trade. Examples of South African and multinational companies that have been using South Africa as a springboard into Africa include companies such as Massmart (MMRTY), YUM! Brands (YUM), and SABMiller (SBMRY), which can all be bought in the US OTC market.

Two-Tier Economy

Although South Africa is technically an emerging market, it is often described as a “two-tier” economy. The “first tier”- consisting of the mining, agriculture, manufacturing, financial services, and retail sectors- is competitive with mature markets in terms of efficiency and level of sophistication. The “second tier” is South Africa’s large informal economy that is best characterized as a third world economy.

Jan Schalkwijk, Portfolio Manager at Africa Capital Group

There is ample room for the first tier to grow relative to the informal economy, as South Africa continues on its development path. The informal economy can also be viewed as an untapped labor pool that can keep wage inflation at bay and ensure ample supply of labor as the first tier expands.

High Savings Rate

South Africa’s gross domestic savings in 2010/2011 amounted to 20% of GDP, which compares to 19.5% for sub-Saharan Africa as a whole and 13% in developed countries [2009]. Though not nearly as high as the 54% gross domestic savings rate in China, South Africa’s savings rate bodes well for future capital formation and economic growth.

Business Culture

South Africa compares favorably to its African peers with regards to ease of doing business, competitiveness, and level of corruption.
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One particularly hopeful data point for South Africa is the progress that has been made with regards to the ease of starting a business and the registration of property, which bodes well for future economic growth.

Progress in the Fight Against HIV/AIDS

During the last decade, South Africa’s GDP growth rate averaged 3.5%. For 2012, South African GDP growth is pegged at just under 4%, compared to 5.8% for Africa as a whole. This growth has been achieved despite having the largest HIV/AIDS population of any country in the world. In 2007, 18% of people aged 15-49 was HIV positive, vs. a sub-Saharan Africa average of 5%.

Though these numbers are bleak, the real story is the progress that is being made in combating HIV/AIDS. The rate of new infections among adults aged 15-49 declined by 35% in the period 2005-2008 compared to 2002-2005 from an annual rate of 2.0 per 100 susceptible individuals to 1.3. HIV/AIDS has a devastating effect on human productivity, therefore a reversal of fortunes for South Africa’s working age population will pay substantial economic benefits, not to mention the alleviation of human suffering that will accompany it.

Declining Crime Rate

Another receding headwind to consider is South Africa’s crime rate. The murder rate per 100,000 citizens in the 2010/2011 reporting year was 31.9, compared to 4.8 in the U.S. (a relatively violent country by Western standards). Again, as with the HIV/AIDS scenario, the absolute number does not tell the full story. In the 2003/2004 reporting year, the murder rate was 42.7 and has been steadily declining since.

One headwind that has not seen improvement, however, is income inequality. The GINI Index measures the level of income inequality within a society. South Africa’s GINI score deteriorated to 67 in 2006 versus 57.8 in 2000 (more recent data is not available). This score is high on an absolute basis and the trend is reason for concern as well. Though its effect on economic growth is not clear, it could breed social unrest which would detract from South African efforts to become a more stable, cohesive society.

Though the jury is still out on income inequality, the bigger picture in South Africa is one of receding headwinds, which bodes well for productivity growth and capital formation.

In the second part of this article, I will explain further why I believe investors should be bullish on sub-Saharan Africa’s largest economy.

Related Reading

18 South African Stocks That Trade On Wall Street

The 10 Best-Performing South African Stocks of 2012 (So Far)

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  1. Lucas Setloboko says

    I would like to know how much is the minimum amount required to invest on the JSE.

    I request an application form for individuals or online link for applying.

  2. mbali says

    when did you earn if you start trading in april . can you please explain the money in Rands . if i can invest R1000.00 . roughly how much can i get in 12 months time . where can i do application.

  3. Theresa thom says

    Hi I have a lot of concerns about the Stock Market at the moment as I am a pensioner and the bulk of my money is invested in shares. I have a good portfolio but am worried at how long it is going to be for the market to turn around. Would it be better to take the money and purchase currency at this time or will the loss on shares be too great.

    • Ryan Hoover says

      Hi Theresa,

      Great question and your concern is understandable. In the short-term, the stock market is unpredictable. But over the longer-term (an investment period of five years or more) the odds are much higher that the net return will be positive.

      This is why many analysts advise investors not to sell during a down-turn. Because when recovery occurs, it often occurs relatively quickly. Thus, buy and hold investors tend to reap higher returns than more active investors. Here’s an article that explains this in more detail:

      That said. If you have money in the market that you anticipate you will need to use within the next five years, you may sleep better at night putting that money in a savings account or treasury bills. The remainder can remain in shares and stand a good chance of generating a positive return over the next 5+ years.

      Hope this helps and all the best to you!

  4. Sreenath says

    Thought of seeking your help in few areas. It would be of great help if you can clarify my below queries in respect to trading in JSE.

    1. How is share allowed to trade in derivative? (Here in India it depends on market cap of a particular share)
    2. I read somewhere that shorting of equity shares are allowed but naked short sells are forbidden. Is this true? Can you throw some light into it?
    3. How are contracts of an equity futures and options formed? (i.e. for how many months and incase of options how are strike price derived?


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