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Friday, March 29, 2024

On Safari for Trades in South Africa

Courtesy of madhedgefundtrader

When I first visited South Africa (EZW) as a journalist in 1979, I was stuffed into the trunk of a car and smuggled into Soweto, a fenced off  “township”, so I could write about the appalling living conditions there. Six ANC bodyguards accompanied my every move, as to venture out alone amidst 100,000 oppressed blacks would have been suicidal. The preferred means of execution then was to jam a sharpened bicycle spoke into your lower back and sever your spinal cord. 

Bringing along my non-white Japanese wife to the land of apartheid didn’t exactly go down well with the white locals either. There was only one hotel in the country that would accommodate us, the elegant Carlton in Johannesburg, the same one that put up John and Yoko Lennon.

The bottom line: everyone hated us. We were lucky to get out alive. Is those days, when long lines of Afrikaners snaked out of coin dealers selling their krugerrands for $900/ounce, everyone was convinced the country would soon blow up in a gigantic, bloody racial war. You could buy a beautiful four bedroom house there on an acre of land for $25,000, servants included.

It never happened. Everyone collectively looked into the abyss and decided to pull back. The Afrikaners made peace with the ANC, an incredible reconciliation process ensued, and by 2010 the country had healed enough to host the World Cup. It’s all proof that if you live long enough, you see everything.

Now South Africa is popping up on the radars of several big hedge funds as one of a handful of frontier emerging markets ready to make the move to prime time. Of course we already know about world class companies like De Beers, Standard Bank, and Sasol, which give it enough muscle to stand out from the rest of the Dark Continent.

But did you know about alternative energy and venture capital? Local entrepreneurs report that South Africa is among the best countries to start a new company these days, with top rate universities, a plentiful, well educated professional class, a trained work force, generous government subsidies for key industries, and a healthy local market. Despite its well earned reputation as the premier source for the world’s gold and diamonds, 50% of the country’s exports were manufactured goods.

This dynamic mix enabled South Africa’s GDP to hold up well during the financial crisis. Analysts are expecting a 3.3% growth rate this year and acceleration to 5% or more next year.

But this all misses the really big play in EWZ, whose ticket to prosperity will get punched by selling into fast growing markets  and a rapidly rising standards of living in the rest of Africa. The entire region has enjoyed accelerating GDP growth rates since 2002. This has been partly fueled by soaring commodity prices where Africa has a lock on the market, such as for cobalt and iridium, crucial elements for advanced electronics and cell phones.

There have been a number of new oil discoveries in Nigeria and Sudan. The Chinese are pouring tens of billions of dollars there into gigantic farms in Africa to feed its own hungry masses. Mass distribution of free anti retrovirals and malaria drugs by the likes of billionaire Bill Gates and the US government has also stopped the AIDS epidemic in its tracks.

The more work I do on Africa generally (AFK), (GAF), the more I like (click here for “Feel Like Investing in a State Sponsor of Terrorism” at http://www.madhedgefundtrader.com/july-30-2010-3.html ). Africa has a population that approaches India and China’s, possibly making it the next cheap labor market. Some 60% of the planet’s remaining uncultivated land is there, which is why China, Libya, and Saudi Arabia have been pouring billions into agriculture there. Africa has 40% of the world’s gold reserves and 10% of its oil reserves, with massive deposits of coal and other key resources.

If you have any doubts, take a look at the direct investment that has been pouring into the banking sector in South Africa in recent years, the most stable and best capitalized industry on the continent. HSBC has gobbled up Ned Bank, Barclays has swallowed ABSA Bank, and China has taken a 20% stake in Standard Bank, probably the best run institution on the continent. Having been a four decade observer of the global financial system, I can tell you from experience that the changing of the guard in the banking system often presages major long term bull markets. You want to follow the smart money here.

Despite all this, only 3% of global direct investment finds there way to Africa. Prices are so low and earnings leverage so great that any dire political risks you can come up with, and there are definitely some out there, have got to already be priced in. It’s just a matter of time before the markets address this imbalance.

Mind you, this is not a country without challenges. The unemployment rate is stuck at a daunting 24.5%, crime is rampant, income disparities are vast, and inter racial strife still percolates under the surface. Pessimists say Armageddon hasn’t been avoided, only postponed. However, when the world’s investors flip back to risk accumulation mode, this is a new country you should consider. High risk can bring in high returns.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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