South Africa: the Unlikely New Safe Haven?
A murky political climate, an angry, strike-prone workforce and an economy unable to generate jobs for a quarter of its adults. A recipe for a Greek-style financial tragedy?
Not in South Africa, where those bitter ingredients have failed to sour investor appetitite for equities. Just weeks after violent protests and work stoppages at the nation’s most productive mines, South African share prices are hitting successive record highs. And despite question marks over President Jacob Zuma’s leadership of the African National Party, the rally is set to continue.
“The political uncertainty is less of an issue now, said Froz Bassa, portfolio manager at Electus in Cape Town, a boutique owned by the Old Mutual Investment Group. “People are a lot less concerned. It’s not as bad as it was in 1994.”
Ironically, investors are viewing South Africa as something of a safe haven from the financial hurricane gripping Europe, a storm that might ultimately fell the exporting economies of the Far East.
It’s an attractive market “relative to other places you can put money,” said Richard Middleton, a portfolio manager at Investec Asset Management in Cape Town, citing a stable rand and low-bond yields, courtesy of foreign buying. “Economically we’re doing fine. We don’t have a banking crisis.”
It would have been a different story had recent labor-related violence, namely the protests at the Marikanamine that left more than 40 dead, occurred a decade earlier. “If Marikana had happened then, it would have blown out the rand,” said Middleton.
The volatile mining sector had become less attractive to foreigners even before the recent deterioration of labor relations. Domestic investors have plugged the gap, but resource shares trade on a one-year rolling average of just ten times earnings, said Middleton.
That could lure foreigners back to the sector. Lonmin, owner of the Marikana mine, rose sharply in London trading Wednesday, after a resolution of that bitter labour dispute.
Resource shares comprise nearly 40 percent of the South African market but it’s the industrial companies that have been quietly powering the rally. The banking and retail sectors have been a magnet for foreign investment. Middleton estimates that between 50 and 75 percent of retail shares are held by offshore funds, looking to invest in companies with pan-African reach.
“If you look at valuations [of industrial shares], they’ve been cheap relative to other emerging markets” such as Turkey or Russia, he said. But with industrials now trading at approximately 22 times earnings, the upside for the sector is limited, he added.
Bassa agreed that a resurgent resource sector could continue to power the South African indices to record highs. “South Africa is linked to the global environment” through commodity exports, he said.
Chinese and Japanese pledges to increase infrastructure investment, along with a third round of quantitative easing in the U.S., can only fuel a demand for South Africa’s most lucrative exports, he added.