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Welcome to the Supernatural Stocks Podcast on Moneyweb, hosted by The Finance Ghost. This podcast serves as your weekly resource for both local and global insights, customized for investors and traders.

As we transition into a new year filled with market opportunities – and their accompanying risks – it’s essential to remember that one cannot exist without the other. The fundamental finance principle dictates that higher risk should be paired with higher potential rewards. Disruption of this balance may indicate either a promising opportunity or a significant threat, depending on the observed changes.

The theory suggests that developed markets carry less risk than emerging ones. However, this doesn’t imply that every sector in developed markets is inherently a safer investment than each sector in emerging markets.

Take the automotive sector in Germany, for example; it currently seems riskier than various investment options available in South Africa. When developed markets increase their risk profile, it becomes particularly concerning, as they often fail to offer corresponding rewards for that added risk. The result is usually a decrease in asset prices, impacting individuals adversely along the way.

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South Africa’s EV tax incentive may draw Chinese investment in the multi-billion-rand industry
China disrupts the global automotive market …
EU imposes tariffs on Chinese EVs, risking backlash

From risky to riskier

As we venture further along the risk spectrum, we encounter frontier markets, which can be quite volatile. These under-developed economies often contend with significant human rights challenges for numerous citizens. Investments in these areas typically concentrate on social impact, drawing on funds from Europe and the U.S. that weigh social metrics alongside financial viability.

This segment of finance is known as impact investing, which plays a crucial role in funding critical projects such as food security and healthcare. Traditional sectors attracting purely profit-oriented investments include telecommunications, mining, and consumer goods.

In my consultancy career, I once had the opportunity to travel to Kenya as part of a capital-raising mission for a fast-moving consumer goods (FMCG) firm. It was eye-opening to see the hurdles in distributing products to remote villages where GPS coordinates were the most reliable form of an address. Sadly, by early 2024, this company failed to secure funding and went into administration …

Read: Transforming Africa’s capital markets …

The reality is: Africa is complex. Incredibly so. Navigating its political terrain can often be convoluted, as borders frequently result from historical colonial divisions rather than cultural identities.

We’ve seen everything from catastrophic genocides to election-related violence – and that’s when elections occur, which is not always guaranteed. Economically, several countries heavily rely on single commodities, making them extremely vulnerable to macroeconomic changes and currency fluctuations.

On top of these obstacles are governments that often exploit corporate struggles …

Whether through exorbitant tax assessments that seem arbitrarily high, or situations such as Zambia’s recent reintroduction of an export tax on emeralds at a particularly inopportune time. Best of luck to Gemfields’ shareholders.

Read:
Is Africa becoming unwelcoming to miners?
South Africans advised to steer clear of Mozambique amid rising protests and border unrest
Gemfields mine invasion underscores the risks of operating in Mozambique

Venture capitalists: delaying the inevitable

A considerable amount of what is labeled as “success” in Africa may simply be deferring the inevitable through ongoing funding rounds with venture capitalists. Very few large platform businesses actually turn a profit; instead, they rely on backing from investors drawn by emerging market mandates and appealing presentations showcasing Africa, often featuring picturesque wildlife.

These capital sources then strive to use the funds to justify their continued existence to investors from developed markets, leading many suboptimal projects to receive investments merely so venture capitalists can claim participation in the funding round.

While some inspiring stories have stemmed from venture capital backgrounds, many resemble the characteristics of Ponzi schemes.

Scaling for growth doesn’t equate to nurturing a sustainable, profitable business.

Too many venture capital-backed firms prioritize just enough growth to attract additional funding rather than focusing on profitability. This tactic is not conducive to sustainable business practices.

What about commodities?

Commodities can be a viable option, provided local governments receive adequate incentives, including both official and, shall we say, “unofficial” ones. It would be naive to claim that publicly traded companies are immune to these dynamics, as corruption is prevalent in frontier markets.

This issue also affects emerging markets like our own, with even developed nations occasionally facing shocking scandals. Humans naturally act in their self-interest, and not all individuals possess stellar morals. The distinguishing factor in frontier markets is often a lack of safeguards, with leaders frequently ruling with an iron grip – legal systems and press freedoms can be severely restricted, allowing them to operate without accountability.

If anyone has successfully navigated the complexities of Africa, it’s likely China. They’ve learned that trading infrastructure for commodities can result in mutually beneficial deals.

This arrangement involves no sheep, only wolves engaging in a precarious dance. It seemingly serves all parties well, though opinions on the ethics of such an approach differ widely.

The crux of my argument is that while risks in Africa are substantial, what about the potential rewards?

Read:
Namibia seeks investment in nuclear power from China
China gains the most from its ties to Africa
China’s interests in Africa are increasingly shaped by the competition for renewable energy

Multiple corporate failures

Can you recall even one remarkable success story from Africa in the past decade involving a South African firm listed on the JSE? Identify one that has consistently prospered through various cycles, rather than merely enjoying one successful year.

Some sectors have attained this level of stability, particularly in financial services and banking, although these industries have had glaring missteps along the way.

Telecommunications has been disastrous. MTN’s stock performance has been so lackluster that the company was compelled to restructure its B-BBEE deal to prevent it from maturing at negligible levels of value.

Vodacom appears to be following suit, taking on associated risks in Egypt and subsequently facing the same foreign exchange challenges.

Have you noticed the recent trend of companies withdrawing from Africa rather than expanding into it? Shoprite recognized the difficult environment and divested from its African exposure to refocus on its domestic market – look at the benefits that followed.

African ventures nearly precipitated the downfall of Nampak, with a significant segment of their survival strategy hinging on exiting from Africa. Property funds are also pulling back.

Read:
MTN records its first loss in eight years due to the naira’s decline
Nampak incurrs R335m in advisory fees after a R1bn rights issue
Why Shoprite acquired three Nigerian malls for R1
Hyprop dividend affected by the sale of Nigerian and Ghanaian assets

Fifteen years ago, expanding into the rest of Africa was integral to nearly every corporate strategy, results presentation, and strategic meeting. Investors clamored for clarity surrounding African strategies.

Today, such discussions are rare, unless examining a significant player like Standard Bank. Even then, performance can vary widely – with no guarantees.

Some niche players have found success with innovative models, like CA Sales Holdings, which is engaging in the FMCG sector, or ADvTECH, providing high-margin educational institutions for expatriates and affluent locals – yet these are exceptions.

Unfortunately, most sectors and nations throughout the rest of Africa have become impractical for investment. The potential rewards simply do not justify the risks involved. This is a disappointing situation, especially for those on the ground who are desperately seeking economic progress. However, it is a reality. Unless China can achieve robust growth again in a fluctuating global setup, I see no immediate improvement on the horizon.

Africa will continue to lean on impact investing, while purely profit-driven intentions will struggle to validate any significant exposure and investments.

Time to Samba?

The beauty of capital is its ability to flow freely toward the most attractive opportunities. It does not languish in one spot. Just because the rest of Africa has proven disappointing for many corporations doesn’t imply that there are no alternatives available elsewhere.

Within the BRICS framework, Russia is depicted as a global pariah, limiting discussion there. China operates under a markedly different economic paradigm than India, which warrants deeper examination. While China predominantly focuses on manufacturing, India’s economy is more service-oriented.

We have substantial indirect exposure to China via our commodities sector, along with Naspers/Prosus due to Tencent. The issues faced by ArcelorMittal have once again underlined the importance of China in the local commodities market and the implications when conditions are difficult for China itself.

Read:
Emerging market stocks in correction as traders evaluate US policies
Tencent shares drop after US designation of company on Chinese military blacklist
ArcelorMittal SA plummets 27% after Newcastle and Vereeniging plant closures
Standard Bank and China renew trade partnership for five additional years

Regarding India, several companies have explored that market, with Sanlam’s investment being one example. It’s not surprising to see a focus on financial services in JSE listings related to Indian investments, reflecting India’s economic structure and its associated opportunities.

But what about Brazil? We are witnessing relatively strong economic growth projected for 2024, exceeding initial expectations. Brazil’s unemployment rate stood at a mere 6% at the end of 2024, a record low. Brazil undoubtedly presents its own set of risks, yet why do we see so few local businesses making forays into South America?

Pepkor took a leap into the Brazilian market with Avenida, an audacious move, and I’m eager to see how this unfolds in the upcoming years. Naspers and Prosus are similarly following suit with Despegar, leveraging the expertise of CEO Fabricio Bloisi, who hails from Brazil.

Read/listen:
Pepkor plans to acquire Brazilian retailer Avenida
New Naspers CEO ignites optimism while MTN faces stark realities
New Prosus CEO tackles tough market and Tencent challenges

What other opportunities might abound within South America, and will our corporations soon shift their focus there, applying lessons learned from their experiences in the rest of Africa?

Identifying potential investments isn’t particularly difficult – hence the thriving investment banking sector. Advisors connect capital with opportunities. If corporate leaders genuinely opt to explore South America, opportunities will undoubtedly arise.

Maybe more executives boarding that SAA flight to São Paulo could bring about positive developments.

I welcome your thoughts on whether South America presents a legitimate opportunity that South African companies should contemplate seriously, or would you rather see them combing through the rest of Africa? Do you regard the rest of Africa as a viable investment landscape?

Read: SAA announces new routes to Brazil from Cape Town and Johannesburg