Finding Value in South Africa

It had been 12 or more years since I was last in South Africa. The difference cannot be more palpable. The last time I was there, talking with friends and acquaintances about the future of South Africa, the mood was so pessimistic that you had to remove sharp objects from the vicinity before you started the conversation. This week, I want to give you some impressions of not only South Africa, but talk a little about emerging markets in general.

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 Canada, with the occasional vacation trip to Mexico.

As I observed South Africa, it was forcefully brought home to me that there is more to the emerging-market story than China, India, and Brazil. There are any number of countries that are seeing robust growth and contributing to the world economy. It was reported at Davos this year that for the first time the developing world has a larger share of world GDP than the developed world. Today, we focus on an emerging-market country that does not make as much news as it should.

As I mentioned above, the mood among those I talked with in South Africa in the early 1990s when I was traveling often to South Africa was quite pessimistic. The economy was not good, due to international economic sanctions stemming from worldwide protests over the policy of apartheid. Changes and elections were coming, and it was not clear what would happen.

I traveled for (mostly) business into 14 other sub-Saharan countries in Africa. With a few notable exceptions, most countries were not doing well and things had progressed from bad to worse over the previous 10-20 years. It was a tough time to try and do business, but it was a great education.

The contrast today is amazing. Before we get into some facts, let me give you a few impressions. First, there are construction cranes everywhere in the four cities I visited: Johannesburg, Pretoria, Durban, and Cape Town. Twelve years ago the thirty miles from Johannesburg to Pretoria was mostly agricultural land. Today it is one big city, with offices, malls, and homes lining the freeway. There was a significant number of rather nice new housing developments, many if not most being built on speculation all along the freeway.

Johannesburg is a world-class city, on a par with New York or London or any major city in terms of facilities, shops, infrastructure ... and traffic. There were new shopping malls all over, and the stores were busy. The restaurants were excellent. The hotels I stayed in and spoke at were excellent and modern. The Santon area is particularly pleasant.

Durban is a tropical jewel on the Indian Ocean. Again, there was construction everywhere - a green, verdant city of 1,000,000 people, with modern roads and great weather.

I have been to Sydney, Vancouver, and San Francisco. I love all of them. But for my money, Cape Town is the most beautiful city I have been to. Amazing mountains, blue water harbors, white sand beaches, with wineries nestled in among the mountains and valleys. The Waterfront area, where I stayed, is fun and vibrant. Again, an amazing amount of construction everywhere, especially in the waterfront area, as investors from Dubai are pouring huge sums of money into creating a massive residential/business/retail/restaurant development. There are several similar, quite large developments going up in different parts of Cape Town.

I ate dinner on 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 California wineries. I was pleasantly surprised to find more than a few South African chards the equal of their US counterparts, but at a third to half the price for the same level of quality. (I should note that a decent chardonnay in London or Europe is twice the US price.)

The 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 2-3 times that at a comparable restaurant in Dallas, and 4-5 times that in New York. Forget London.

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 Texas for the same quality. 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 is 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 London and Europe for my last few overseas trips, South Africa seemed like a bargain.




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 India, Ireland, South Africa, and Mainland China.

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 South Africa. While much of the income may not be reported, when something is bought and sold in the retail sectors, taxes are collected.

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. South Africa has a strong commodity sector, with numerous commodities and not just gold. JP Morgan thinks that earnings growth for South African companies, even adjusting for some anomalies, will be 20% this year, which should mean another good year for their local 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 ten 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 China story.