For more than a century, South Africa has been one of the world’s major sources of diamonds. It’s nearly twice the size of Texas and extracts more gold and platinum each year than any other country. Millions of tourists visit its romantic coastline, rugged mountains and nature reserves full of roaming elephants, lions, leopards and rhinos.
From an economic standpoint, South Africa’s unemployment rate has declined, its interest rates have plunged by two thirds, inflation remains in check, the exchange rate has stabilized and economic growth in the country has been humming close to 5 percent. The Johannesburg Stock Exchange (JSE) ranks among the most active in the world.
Much of the buoyancy within this former British colony can be traced to the 1990s, when decades of apartheid were replaced by a new constitution and democratic government. ‘It is a country in transition, reaping the benefits of the miracle of democracy that we fought for and achieved,’ says Vassi Naidoo, a 27-year veteran of Deloitte and its South Africa CEO for the past eight years. ‘I also think it is a country poised for greater success.’
A key part of that success is likely to stem from the 2010 World Cup, which South Africa is hosting. Partly to prepare for the event, and partly to prepare for the demands of a burgeoning black middle class, the country is investing heavily in transportation and infrastructure.
The showcase project is a high-speed train link between Johannesburg and Pretoria. Other plans call for expanding power generation and water supplies, doubling tourism, and positioning the country as a business base for penetrating the African continent.
Appetite for domestic equities
The country’s recent economic success provides an early-stage opportunity for money managers to invest in companies poised to benefit from future growth, Naidoo believes.
For South African public companies, that message can be targeted to institutions in the country’s three primary financial centers – Johannesburg, Cape Town, and to a lesser extent, Durban.
‘Cape Town and Johannesburg are like the Chicago and New York of South Africa,’ comments Rickus Conradie, an investor relations officer who focuses on South African operations for worldwide brewer SABMiller.
Fund managers are located in both Cape Town and Johannesburg, working with traditional banking and insurance companies as well as established independents and boutiques. Most of the sell side is in Johannesburg, attached to investment banks like JPMorgan, Deutsche Bank, HSBC and Citigroup.
According to market intelligence company CapitalBridge, South Africa’s largest buy-side investment firm is Johannesburg-based Stanlib Asset Management, with $10.5 bn under management. The tenth largest buy-side firm, Investment Solutions, manages about $2.6 bn.
‘South Africa-based firms own only something like 0.4 to 0.5 percent of the world’s equity under management – ranking about 20th globally – so South Africa is not a very significant player overall,’ says Cary Krosinsky, director for ownership data at CapitalBridge. For South African IR professionals, however, Cape Town and Johannesburg provide ample targeting and investment opportunities.
Meeting schedule
In Cape Town, Conradie points out, the majority of institutional investors are within ten to 15 minutes of the city center so a central meeting location is ideal. ‘It’s a different story in Johannesburg,’ he says. ‘The center of the city is too decrepit and dangerous.’ With the financial firms migrating to Johannesburg’s north end, meetings should be scheduled at venues easily accessible from the Sandton and Rosebank suburbs.
Morne Reinders, a financial communications director for IR firm Dynamo Africa, says that breakfast meetings starting at 7 or 7.30 am can be popular, as the workday normally begins at 8 am. Forget trying to schedule meetings during the summer holidays of December and January or the public holidays in April.
‘Investors are less likely to meet with companies outside of their reporting periods, but then they do prefer one-on-ones,’ says Reinders. ‘In terms of new companies, investors want to get in first before their fund manager colleagues.’ Sell-side analysts also prefer one-on-ones, but unlike their buy-side counterparts, they are more likely to go on company visits.
Rob Forsyth, fund manager for Johannesburg institution Investec Asset Management, stresses that it’s important to keep company presentations focused. ‘We want the standard things: what your business model is, your margins, how you are executing the business model,’ he says.
Barriers to entry
The prevailing message to public companies outside of South Africa looking for investment from institutions based in the country? It might be easier elsewhere.
Distance can be a factor, particularly for US IROs scheduling trips to South Africa for their CEO or CFO. ‘You have to cross so many time zones, and once you reach continental Africa, the plane refuels in Senegal, where the flight crew changes and the planes are debugged,’ says Tom Kusner, a financial data director for CapitalBridge who visits South Africa four times a year. ‘Door to door, it can take 24 hours,’ he adds.
The relatively small pool of assets under management in South Africa plays a role, as do the traditional regulatory curbs on capital flows going outside the country. Investment funds have restrictions on the amount of capital that can be allocated for foreign investments. Individuals must also limit foreign investment to ZAR2 mn.
‘The number of pure-play international companies without a South Africa history coming here for roadshows is quite small,’ says Garreth Elston, deputy chairman of the CFA Society of South Africa. ‘It isn’t so much that there isn’t an interest in foreign equities, but it’s hard to get companies down here.’
Institutional visits come largely from multinational companies that are either based in South Africa or have significant South African operations. In many cases they are listed on both the JSE and another major stock exchange, and they generally represent companies in the oil and mining, resources, and banking sectors.
Institutional visits would make sense for Barclays, which purchased South African bank Absa last year and has significant local operations, says Forsyth.
‘A big plus to the Barclays transaction is exposing the market to international thinking and more investment opportunity,’ comments Elston. ‘That’s extremely positive.’
Because of the difficulties for foreign companies visiting South Africa, Elston suggests that a group of companies band together for a two or three-day market trip to make presentations and schedule one-on-one meetings.
Challenging times
There’s good reason to expand the potential investment pool for South African public companies. While the nation as a whole has progressed in the last decade, a number of significant economic, social and political issues continue to cloud the investment climate.
A 2004 study commissioned by a local IR firm asked South African fund managers and analysts to list reasons why entities wouldn’t invest in South African companies. Nearly six in ten cited government regulation and political interference. Other reasons were labor issues (47 percent), the effects of crime and violence (40 percent) and HIV/Aids(40 percent), skills shortages (36 percent) and the rand/dollar exchange rate (29 percent).
As evidenced by the latrines and shanties scattered across the country from Cape Town to the coastline, and statistics showing 20 percent of the population is living with HIV/Aids, many problems remain to be tackled in South Africa. A recent Financial Times series examined the government and private sector’s involvement with opportunities and challenges including higher education and labor issues, the coming presidential transition, transportation infrastructure, electric power grid enhancements and tourism development. There are many concerns for investors, including the fact that South Africa remains one of the few countries with foreign exchange controls.
But the opportunities for foreign companies to establish a long-term base in South Africa for future expansion into Africa – as Barclays, Mittal Steel and several other companies have done through acquisitions – are still there, concludes Naidoo.
‘The opportunity is there, if you have a vision and are prepared to invest long-term,’ he says. ‘The economy is very positive, the government has made positive political changes over the last ten years and the emergence of the middle class has created a whole new level of consumer spending.’
