Investment Guru finds value in South Africa
9 February 2007
I realized about halfway through my recent trip that it had been some time since I was in an emerging-market country. I have been to over 50 countries over the past 20 years, but recently most of my travels have been to Europe and
As I observed
Here we focus on an emerging-market country that does not make as much news as it should.
The mood among those I talked with in
The contrast today is amazing.
World-class cities; cranes everywhere
There are construction cranes everywhere in the four cities I visited:
I have been to
Again, an amazing amount of construction everywhere, especially in the Waterfront area, as investors from
Value for money
I ate dinner one Friday night at a restaurant called Baia at the Waterfront. I find I really love the better South African chardonnays. My friends know I am something of a chardonnay snob. I like the better
I was pleasantly surprised to find more than a few South African chards the equal of their
Two of us had the best chardonnay in the restaurant and one of the better meals I have had in a long time, and the bill was less than $100. The next day my partner, Prieur du Plessis, informed me that Baia was one of the most expensive restaurants in town.
By way of comparison, you can easily spend two to three times that at a comparable restaurant in
I began to ask about the bills for food, drinks and such for the rest of the trip. The country was uniformly about half what I would pay in
I stayed in a very nice five-star hotel (The Commodore) for six nights for less than $1 000, including several meals, laundry and my bar tab. Their walk-up price was much higher, but clearly you can get deals, and it was tourist season at that. The service was terrific and uniformly delivered with smiles.
The exceptionally nice private game reserve (Itaga) we stayed at when I first arrived, trying to get over jet lag, was only a few hundred a night, including meals, wine and game runs. In short, after having been to
Optimism fuelled by growth
And it was not just the people I spoke to that were optimistic. Grant Thornton (a large international accounting firm) did a survey in the 30 countries in which they do business. The four countries with the most optimism and confidence were
Why such confidence? I think there are several reasons. The economy has been growing at a reported almost 5% a year for the past several years, which is quite strong. They have had 32 consecutive quarters of positive growth.
But the official figures may understate the reality by a significant amount. If you look at the VAT (value-added tax) receipts, as well as other tax figures, some economists estimate the economy may be growing by 7% or more. Why the difference?
There is a large "informal" economy in
The stock market has grown by over 25%, 47% and 41% for the last three years. Such a bull run is always a boost to confidence. But there are also some real fundamentals underlying the emerging-market bull markets.
This link between commodities and stock market prices is reflected not just in their stock market, but in emerging markets worldwide. Look at the close correlation for the last 10 years between the prices of commodities and the emerging-market equity index. I think this rather clearly shows the link between the recent rise in commodity prices and emerging markets. It is more than just a
Football as an economic driver
The attention paid to football (or soccer in the
The government is using the occasion to spend some R400-billion (a little over US$50-billion) on all sorts of infrastructure projects. They are doubling the size of the major airports, which had already been significantly improved. Walking past the construction at the
New roads and other forms of infrastructure are being added to prepare for the influx, but it will have the added effect of making the country more competitive, just as infrastructure in
The World Cup will also be a boost to tourism, already one of the most important sectors of the economy.
A deal-doing financial centre
Interestingly, 75% of the traffic reported in the tourism growth is from Africa and the
The rest of the world rightly sees
Problems common to emerging markets
Are there problems in
While the overall crime rate is dropping, it is still far too high. Some rather high-profile crimes of late have resulted in a strong outcry for serious change.
Corruption is an issue, but that is the case in almost every emerging-market country. The high levels of poverty are evident. Although employment is growing and more and more of the poor are being brought into the economy, there is still a lot of room for progress.
The telecommunications infrastructure is hampered by a lack of serious competition. Access to the internet is limited in many areas, and it is really slow where it does exist. This will improve in the coming years, but it is a serious handicap to business. There are power shortages and the need for more power-generation plants to keep up with the growth.
But all these areas are (mostly) going to improve.
Potential in African farmland
I see a lot of opportunity in
I think there is deep long-term value in African (not just South African) farmland. Right now, given the nature of US and European subsidies to agriculture, it is hard for developing-world farmers to compete. But that will change in the next decade.
As I have written before, "Old Europe" and the
Quite simply,
Budgets are going to have to be cut in other areas. At some point, sooner rather than later, agricultural subsidies are going to come under pressure, as politicians must decide where to find the money to pay for the promised pensions and health care. There are more voters who are older and on pensions than there are farmers.
I can count votes, and it is not hard to predict the result. It will be with a lot of fighting, but in the medium run the agricultural subsidies in
When the writing is clearly on the wall,
Africa will become a breadbasket for much of
The simple fact is that as the world grows more prosperous we are going to need more grain and other foods. Where is the land we are going to need to feed the world? There is an abundance in
And as African countries upgrade their infrastructure, it will improve the ability of farmers to get their grains to market at profitable levels.
There is much to like about emerging markets. That is where a great deal of the real potential growth in the coming decades will be. And
This is an edited version of an article published in the 9 February 2007 issue of John Mauldin's free weekly investment e-letter, Thoughts from the Frontline.
Mauldin is president of Millennium Wave Investments. A recognized expert on investment issues, he is a frequent contributor to financial publications such as the Financial Times, and a frequent guest on CNBC and Bloomberg TV. His book "Bull's Eye Investing" made it onto the New York times best seller list. In his latest book, Just One Thing, "twelve of the world's best investors reveal the one strategy you can't overlook".
Property in Observatory, Cape Town, South Africa on http://www.hotpropertyincapetown.com
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