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Welcome to the Supernatural Stocks Podcast on Moneyweb, hosted by The Finance Ghost, your weekly destination for local and global insights designed specifically for investors and traders.
As we embark on a new year filled with market potential – and the risks that accompany it – it’s crucial to remember that both elements are inherently linked. The core tenet of finance implies that assuming greater risk typically leads to higher rewards. Disruptions to this balance could signal either a compelling opportunity or a risky situation, based on the changes observed.
Generally, developed markets should present lower risks when compared to emerging markets. However, this does not automatically mean that every sector within a developed market is a safer bet than its emerging counterparts.
Take, for example, the automotive sector in Germany, which seems to face greater risks currently compared to various investment opportunities in South Africa. This situation becomes particularly alarming when developed markets elevate their risk profiles without offering adequate reward, often leading to declines in asset prices that adversely affect individuals involved.
Listen/read:
Top Supernatural Stocks podcasts for 2024 by The Finance Ghost
South Africa’s EV tax incentive could entice Chinese investment in a multi-billion-rand sector
China disrupts the global automotive industry …
EU imposes tariffs on Chinese EVs, stirring potential retaliation
From risky to riskier
As we further explore the risk landscape, we encounter frontier markets, where conditions can often be quite unstable. These underdeveloped countries frequently grapple with essential human rights issues for many citizens. Investments directed into these areas often prioritize social impact, sourcing funds from Europe and America that assess social metrics alongside financial outcomes.
This segment of finance is known as impact investing, which fosters vital projects such as food security and healthcare. Sectors that typically draw solely profit-oriented investments include telecommunications, mining, and consumer goods.
Years ago, during my advisory career, I had the opportunity to visit Kenya as part of a capital-raising initiative for a fast-moving consumer goods (FMCG) company. It was eye-opening to see firsthand the hurdles faced in distributing products to villages where GPS coordinates served as the primary address. Unfortunately, by early 2024, the company failed to secure necessary funding and fell into administration …
Read: Transforming Africa’s capital markets …
The reality is: Africa presents significant challenges. Incredibly daunting challenges. Navigating its political environment can often be intricate, as borders frequently reflect historical colonial delineations rather than cultural affiliations.
We have witnessed everything from devastating genocides to violence linked to elections – assuming elections transpire, which isn’t always guaranteed. Economically, many nations rely heavily on single commodities, rendering them exceedingly susceptible to macroeconomic fluctuations and currency variances.
These challenges are exacerbated by governments that often seem to exploit corporate difficulties …
This might manifest through exorbitant tax assessments that appear whimsically inflated, or through situations like the recent reintroduction of an export tax on emeralds in Zambia at a most inopportune time. Good luck to Gemfields’ shareholders.
Read:
Is Africa becoming hostile to miners?
South Africans advised to avoid Mozambique amidst rising protests and border disruptions
Gemfields mine incursion underscores the risks linked to operating in Mozambique
Venture capitalists: prolonging the inevitable
A significant share of what is deemed as “success” in Africa often entails merely delaying the inevitable through successive funding rounds from venture capitalists. Very few large platform businesses demonstrate true profitability; rather, they rely on securing backing from investors driven by emerging market mandates and polished presentations showcasing Africa, punctuated by picturesque wildlife imagery.
This leads them to deploy this capital solely to justify their ongoing existence to investors from developed markets, resulting in many less-than-ideal projects receiving funds just so venture capitalists can brag about their participation in the funding cycle.
While some uplifting stories have emerged from venture capital backgrounds, many resemble the traits of Ponzi schemes.
Scaling for growth does not equate to establishing a sustainable, profitable business.
Far too many venture capital-backed enterprises primarily focus on expanding sufficiently to secure additional funding rather than achieving profitability—a strategy that does not support sustainable business practices.
What about commodities?
Commodities can be a promising avenue, provided that local governments offer adequate incentives, which may include both official and, let’s say, “unofficial” measures. It would be naive to suggest that publicly traded companies are completely shielded from these dynamics, as corruption remains rampant in frontier markets.
This issue is also pertinent in emerging markets like ours, with even developed nations occasionally facing shocking revelations. Humans, by their very nature, act in self-interest, and not all individuals uphold admirable morals. The differentiating factor in frontier markets is often the absence of safeguards, with leaders frequently exercising authoritarian control—legal systems and press freedoms may be severely constrained, allowing them to function without accountability.
If anyone has unraveled Africa’s complexities, it has likely been China. They have realized that trading infrastructure for commodities can yield mutually beneficial outcomes.
This arrangement involves no sheep, only wolves engaged in a delicate dance. It seems to suit all parties well, although views on the ethics of such an approach vary significantly.
The crux of my argument is that while the risks in Africa are significant, what about the potential rewards?
Read:
Namibia seeks Chinese investment in nuclear power
China benefits the most from its connections with Africa
China’s interests in Africa are increasingly shaped by the race for renewable energy
Numerous corporate failures
Can you think of any remarkable success stories from Africa in the last decade involving a South African firm listed on the JSE? Identify one that has consistently thrived across multiple cycles rather than merely enjoying transient good fortune.
While some sectors have reached this level of achievement, particularly in financial services and banking, they have also encountered glaring failures along the way.
The telecommunications industry has faced catastrophes. MTN’s stock performance has been so disappointing that the company was compelled to restructure its B-BBEE deal to avoid it maturing at worthless levels.
Vodacom appears to be following suit, taking on associated risks in Egypt and subsequently grappling with the same foreign exchange issues.
Have you noticed the recent trend of companies withdrawing from Africa rather than advancing into it? Shoprite recognized the challenging landscape and divested from its African operations to refocus on its domestic market – look at the subsequent rewards.
African ventures nearly led to the demise of Nampak, with a significant portion of their survival strategy hinging on exiting from Africa. Property funds are also scaling back.
Read:
MTN has its first loss in eight years due to the naira’s decline
Nampak incurs R335 million in advisory fees after a R1 billion rights issue
Why Shoprite acquired three Nigerian malls for R1
Hyprop dividend affected by the sale of Nigerian and Ghanaian assets
Fifteen years ago, expanding into the rest of Africa was a fundamental aspect of nearly every corporate business strategy, results presentation, and strategic meeting. Investors demanded a clear African strategy.
Now, it’s infrequently mentioned unless concerning a major player like Standard Bank. Even then, performance can vary widely – nothing is guaranteed.
Some niche players have found success with innovative models, such as CA Sales Holdings tapping into the FMCG sector, or ADvTECH offering high-margin schools catering to expatriates and affluent locals – but these remain exceptions.
Regrettably, the majority of sectors and nations in the rest of Africa have become unfeasible for investment. The potential rewards simply do not vindicate the associated risks. This is a disheartening situation, especially for those on the ground seeking economic advancement, yet it remains an undeniable fact. Unless China can attain robust growth amid a globally fluctuating environment, I foresee no imminent shift in this status quo.
Africa will continue to depend on impact investing, while ventures motivated solely by profit will struggle to justify any investment exposure.
Time to Samba?
The beauty of capital is its ability to flow where the most attractive opportunities lie. It won’t stagnate in any particular locale. Just because the rest of Africa has proven to be an unfortunate tale for most corporations doesn’t mean that other viable alternatives aren’t found elsewhere.
Within the BRICS framework, Russia stands as a global pariah, thus there’s little to discuss there. China operates under a distinctly different economic model than India, which merits additional exploration. While China is primarily driven by manufacturing, India’s economy is much more services-oriented.
We have substantial indirect exposure to China via our commodities sector, along with Naspers/Prosus due to Tencent. The difficulties encountered by ArcelorMittal have once again underscored the importance of China in our local commodities market and the repercussions that arise when China itself falters.
Read:
Emerging market stocks enter correction as traders evaluate US policies
Tencent shares drop after US designates company on Chinese military blacklist
ArcelorMittal SA plunges 27% amidst Newcastle and Vereeniging plant closures
Standard Bank and China renew trade partnership for an additional five years
As for India, a handful of companies have ventured into that market, with Sanlam’s investment serving as one example. It’s not surprising to see a focus on financial services in JSE listings associated with Indian investments, reflecting India’s economic framework and available prospects.
But what about Brazil? We observe relatively robust economic growth anticipated for 2024, exceeding initial forecasts. Brazil’s unemployment rate registered a historic low of just 6% by the end of 2024. Of course, Brazil has its own set of risks, yet why do we see so few local businesses venturing into South America?
Pepkor has ventured into the Brazilian market with Avenida, a bold move, and I’m eager to see how it unfolds in the coming years. Naspers and Prosus are also proceeding with Despegar, utilizing the expertise of CEO Fabricio Bloisi, who has roots in Brazil.
Read/listen:
Pepkor plans to acquire Brazilian retailer Avenida
New Naspers CEO instills optimism while MTN faces stark realities
New Prosus CEO takes on a challenging market and Tencent-related issues
What other opportunities may exist within South America, and will our corporations soon redirect their focus there, utilizing the insights gained from their experiences in the rest of Africa?
Finding potential investments isn’t overly complicated – that’s why the investment banking sector flourishes. Advisors help connect capital with opportunity. If corporate leaders are genuinely inclined to explore South America, opportunities will undoubtedly present themselves.
Perhaps more executives boarding that SAA flight to São Paulo could yield positive results.
I welcome your perspectives on whether South America represents a genuine opportunity that South African firms should seriously consider, or would you prefer to see them sifting through the rest of Africa instead? Do you see the rest of Africa as a viable investment landscape?
Read: SAA announces new routes to Brazil from Cape Town and Johannesburg
