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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 specifically for investors and traders.
As we enter a new year filled with market potential — along with its inherent risks — it’s vital to acknowledge that one does not exist without the other. The foundational idea in finance posits that greater risk is expected to bring about higher rewards. If this balance is disturbed, it may reveal either an enticing opportunity or an alarming one, depending on the fluctuations we observe.
Ideally, developed markets are meant to carry less risk compared to emerging ones. However, this doesn’t guarantee that each sector within a developed market is inherently safer than those in emerging markets.
For example, the automotive sector in Germany currently seems riskier than multiple investment avenues available right here in South Africa. This situation becomes especially concerning when developed markets escalate their risk profile, often without offering additional returns to justify such risk. The outcome can lead to declining asset prices, adversely affecting individuals along the way.
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South Africa’s EV tax incentives might draw Chinese investments into the multi-billion-rand industry
China disrupts the global automotive sector …
EU imposes tariffs on Chinese electric vehicles, risking retaliation
From risky to riskier
Diving deeper into the risk landscape, we encounter frontier markets where conditions can be quite chaotic. These underdeveloped economies frequently struggle with basic human rights issues for many citizens. Investments directed to these areas often prioritize social impact, drawing funds from Europe and the U.S. that consider social metrics alongside financial performance.
This field of finance is known as impact investing and supports vital projects like food security and healthcare. Sectors that traditionally attract purely profit-focused investments include telecommunications, mining, and consumer goods.
In my earlier advisory career, I had the opportunity to visit Kenya to assist in raising capital for an FMCG company. It was eye-opening to see the struggles in delivering products to villages where GPS coordinates served as the best addresses. Unfortunately, by early 2024, the company couldn’t secure funding and entered administration …
Read: Transforming Africa’s capital markets …
The truth is: Africa is tough. Incredibly tough. Navigating its political landscape can be convoluted, as borders often reflect historical colonial divisions instead of cultural identities.
We have seen everything from devastating genocides to violence surrounding elections – assuming elections take place at all, which is not a given. Economically, many nations heavily rely on single commodities, which renders them highly susceptible to macroeconomic shifts and currency fluctuations.
Compounding these difficulties are governments that exploit corporate hardships …
This occurs through exorbitant tax assessments that seem whimsically inflated or situations such as the recent reinstatement of an export tax on emeralds in Zambia at a most inconvenient time. Best of luck to Gemfields’ shareholders.
Read:
Is Africa turning hostile to miners?
South Africans advised to avoid Mozambique amidst growing protests and border chaos
Gemfields mine invasion highlights the risks of operating in Mozambique
Venture capitalists: delaying the inevitable
A large portion of what is labeled as “success” in Africa often equates to merely postponing the unavoidable via successive funding rounds with venture capitalists. Very few large platform businesses are genuinely profitable; instead, they rely on attracting investment from those enticed by emerging market appeals and visually impressive presentations showcasing Africa, often accompanied by captivating wildlife imagery.
Consequently, they seek to deploy this capital to justify their continuing existence to investors from developed markets, allowing many less-than-ideal projects to secure funding simply so venture capitalists can claim involvement in the funding round.
While some successful stories have emerged from venture capital backgrounds, many resemble the characteristics of Ponzi schemes.
Scaling for growth does not mean establishing a sustainable, profitable business.
Far too many venture capital-supported ventures focus primarily on growing just enough to secure additional funding rather than on achieving profitability. This approach is not conducive to sustainable business practices.
What about commodities?
Investing in commodities can be a worthwhile option, given that local governments receive sufficient incentives, which can be both official and, shall we say, “unofficial.” It is naive to presume that publicly traded companies are entirely insulated from such dynamics, as corruption remains a prevalent issue in frontier markets.
This problem extends to emerging markets like our own, with even developed nations occasionally facing stark revelations. Humans inherently act out of self-interest, and not all individuals are motivated by strong ethics. What sets frontier markets apart is often the absence of safeguards, with authoritarian leaders ruling decisively — resulting in restricted legal systems and press freedoms, allowing them to act without accountability.
If anyone has unraveled the complexities of Africa, it’s probably China. They have realized that bartering infrastructure for commodities can lead to mutually beneficial arrangements.
This arrangement involves no sheep, only wolves engaged in a precarious interrelationship. It seems to adequately serve all involved, although perspectives 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 investment in nuclear power from China
China benefits the most from its relationship with Africa
China’s interests in Africa are increasingly influenced by the race for renewable energy
Numerous corporate failures
Can you name even one exceptional success story from Africa over the last decade involving a South African company listed on the JSE? Identify one that has consistently thrived through various cycles, rather than simply enjoying one good year.
Some sectors have achieved this level of success, particularly in financial services and banking, although there have been noticeable mistakes along the way within these industries.
The telecommunications sector has been disastrous. MTN’s stock performance has been so poor that they were compelled to restructure their B-BBEE deal to prevent it from maturing at minimal value.
Vodacom appears to be following suit, taking on the associated risks in Egypt and subsequently facing similar foreign exchange challenges.
Have you noticed the recent trend of companies pulling back from Africa rather than expanding into it? Shoprite recognized the challenging environment and divested from its African operations to concentrate on its domestic market — and the benefits have been evident.
African ventures nearly led to Nampak’s collapse, with a significant part of their survival strategy reliant on exiting Africa. Property funds are also withdrawing.
Read:
MTN records its first loss in eight years due to the naira’s decline
Nampak incurs R335 million in advisory fees following a R1 billion rights issue
Why Shoprite bought three Nigerian malls for R1
Hyprop dividend affected by the sale of Nigerian and Ghanaian assets
Fifteen years ago, expanding into the African continent was a fundamental aspect of nearly every business strategy, results presentation, and strategic discussion. Investors clamored for a solid African strategy.
Today, it’s rarely mentioned unless discussing a major player like Standard Bank. Even then, performance can fluctuate significantly — nothing is guaranteed.
Some niche players have carved out success with innovative models, such as CA Sales Holdings, which is engaging the FMCG sector, or ADvTECH, offering high-margin schools catering to expatriates and wealthier locals — but these are exceptions.
Sadly, most sectors and countries in the rest of Africa have become unfeasible for investment. The possible rewards simply do not outweigh the accompanying risks. This is a disheartening truth, especially for the individuals on the ground striving for economic growth, but it is a reality we cannot ignore. Unless China can achieve robust growth amidst global fluctuations, I do not foresee an imminent improvement in this situation.
Africa will continue to depend on impact investing, while purely profit-driven initiatives will find it hard to justify any level of exposure and investment.
Time to Samba?
The great advantage of capital is its ability to move freely toward the most appealing opportunities. It does not stagnate in one place. Just because the rest of Africa has turned out to be a bleak narrative for most corporations does not imply that there are no alternatives elsewhere.
Within the BRICS framework, Russia has become a global outcast, so there’s little to discuss there. China operates under a distinctly different economic paradigm compared to India, which warrants further exploration. China leans heavily on manufacturing, while India’s economy is predominantly service-oriented.
We have significant indirect exposure to China via our commodities sector, along with Naspers/Prosus due to Tencent. The challenges faced by ArcelorMittal have underscored the importance of China in the local commodities market and the repercussions when China itself encounters difficulties.
Read:
Emerging market stocks face correction as traders evaluate US policies
Tencent shares fall after the US designates the company on the Chinese military blacklist
ArcelorMittal SA drops 27% after Newcastle and Vereeniging plant shutdowns
Standard Bank and China renew trade partnership for another five years
As for India, a few companies have made inroads into that market, with Sanlam’s investment being one notable example. It’s not surprising to see a focus on financial services in JSE listings related to Indian investments, reflecting India’s economic setup and the opportunities that come with it.
But what about Brazil? We are seeing relatively strong economic growth projected for 2024, exceeding initial expectations. Brazil’s unemployment rate stood at just 6% at the end of 2024, marking a historic low. Brazil, of course, poses its own risks, yet why do we see so few local businesses exploring South America?
Pepkor entered the Brazilian market with Avenida, a bold move, and I am eager to observe how it unfolds in the coming years. Naspers and Prosus are also making moves with Despegar, utilizing the expertise of CEO Fabricio Bloisi, who has Brazilian roots.
Read/listen:
Pepkor plans to acquire Brazilian retailer Avenida
New Naspers CEO inspires optimism as MTN faces stark realities
New Prosus CEO confronts a challenging market and Tencent issues
What other prospects could be waiting in South America, and will our corporations pivot their focus there, applying lessons learned from their experiences in the rest of Africa?
Finding potential investments isn’t particularly difficult — that’s why the investment banking sector thrives. Advisors act as the link between capital and opportunity. If corporate leaders truly commit to examining South America, opportunities are sure to arise.
Maybe a greater number of executives boarding that SAA flight to São Paulo could yield fruitful outcomes.
I welcome your thoughts on whether South America represents a viable opportunity that South African firms should genuinely consider, or would you rather see them continue to scrape through the rest of Africa? Do you see the rest of Africa as a viable investment region?
Read: SAA announces new routes to Brazil from Cape Town and Johannesburg
