Is South Africa a structural short?

Why do you invest into emerging markets (EM)? In simple terms the main reason is that you are betting the countries will show growth rates above developed markets (DM). Ultimately your view is that these EM can become developed countries at some point.  You are willing to take risk that is higher than investing into the developed world. You buy and hold and enjoy the bumpy ride the Mobius way, you expect returns far above investments from DM exposure. Correct?

South Africa (SA) has been the hope trade within EM for such a long time. Unfortunately, SA has been showing growth rates that are far below potential for some time now and one can even say that there is no real growth at all currently. Corruption, incompetence, mismanagement is costing the country dearly. Living in SA, it really feels like moving towards a frontier market rather than towards a developed market – trust me, you don’t want to hear this sad story. Infrastructure is falling to pieces (FACT!) and the private sector has to step in – that is not a great sign for a country that is calling itself the “most industrialized” one of the African continent. That is the route towards Lagos – a few wealthy and more and more poor who cannot make plans (pay) for their own water, electricity, education, safety. That while tax rates here are as high as in developed markets. Close to 70% of GDP in SA is driven by consumption – should it not be driven by infrastructure and maybe mining? Social grants are dished out while the country cannot afford these absolute enormous amounts. Again, this part of the budget should get invested into the future of the country, but literally gets consumed away (teach a man to fish and so on). To finance this, SA’s treasury has enjoyed tailwinds from a commodity boom that is now coming to an at least temporary end – you can easily see where the budget is going to end with. For western based investors and trading partners (and the majority of FDI and trade is western based) red flags are getting raised in blatant ways now. The hand that helps to feed SA is bitten. This all adds up and long-term investment decisions into (and for) SA are becoming relatively (there are always other destinations) and increasingly more difficult. Eish!

For equity investors, SA remains a trading market, not a long-term buy-and hold destination. No Mobius story I’m afraid. The structural underweight for global investors has paid outperformance for a long-long time and will so for the foreseeable future. Yes, a lot of SA listed companies screen “cheap” – but for good reasons. The problem is that this also makes shorts a tough game. Conviction levels on both ends are generally low.

What could change this view? Two scenarios really. One is that the current government delivers and implements on what it says. Second, next year the SA electorate can vote for change – that is the beauty of a democracy!