The Case for Bargain Hunting in South Africa

The Case for Bargain Hunting in South Africa

Charles Roth, of Thornburg Investment Management, has made the case that markets have over-reacted to the recent political shake-up in South Africa, driving asset prices below their underlying value.

Thus (although Roth doesn’t put the point quite this bluntly) this could be a time for some bargain hunting.

 Finance Ministry Turnover: December

Jacob Zuma, the President of South Africa and flag bearer of the country’s leading political party, the African National Congress, fired his finance minister in December 2016. The minister in question, Nhlanhla Nene, was a known quantity to the markets, and the rand lost 10% of its forex value over the two days after the announcement of Nene’s departure. He was replaced at first by David van Rooyen, the former National Assembly member for Westville Westonaria City, and a spookily unfamiliar figure in financial circles.

Four days after the announcement, Zuma changed tack, perhaps in reaction to the fall of the rand in the meanwhile. On December 13 he arranged for van Rooyen to switch posts with Pravin Gordhan, who was then the Minister of Cooperative Governance and Traditional Affairs. More important for forex traders, Gordhan had run the finance minustry before (2009-2014). Markets knew him and were unspooked.

Under Gordhan, the rand did recover from the December drop. By late March, it was worth US$0.08, a level not seen since the summer of 2015.

Finance Ministry Turnover: March

But … the real shake-up in the finance ministry was yet to come. On March 31, 2017, Zuma fired both Minister Gordhan and Deputy Minister Mcebisi Jonas. The Secretary General of the ANC says the cause for this was an “irretrievable breakdown of the relationship” between Zuma and Gordhan, and adds that the party has “full confidence in the newly appointed minister of finance.”

That new Finance Minister is Malusi Gigaba, who is neither a known quantity to public markets nor (to the extent something is known) is he seen as their friend. The value of the rand accordingly took another steep drop at the start of April.

This might not seem intuitively to be a great time for outsiders to be looking to South Africa for investment opportunities but Roth says in effect: no guts, no glory.

He observes that not only has the rand fallen off a cliff since Gordhan’s departure, but the yield on the 10-year sovereign bond has headed sharply higher, and the benchmark stock index has headed down too, though not so dramatically. It has “drifted” down, in Roth’s gentle choice of  verb.  This might, Roth wrote, mean that “bottom up investors who like buying quality companies with bright earnings prospects at reduced prices” should give the stocks of South African companies a careful once-over. This is especially true for companies with global exposure.

Consider Brazil

Such investors might draw an analogy between South Africa now and Brazil at the end of 2015 and in early 2016. It was on December 2, 2015, that the President of Brazil’s Chamber of Deputies officially accepted an impeachment petition against President Dilma Rousseff, charging her with complicity in the Petrobras scandal. This created intense street-level conflict in the country, and grave uncertainty among the world’s investors.

The Indice Bovespa (the benchmark for Brazilian equities) was in the neighborhood of 45,870 just before that petition was accepted. Within weeks it had fallen more than 17%, hitting bottom at 38,031.

The political instability wasn’t the only difficulty for Brazil’s economy a year ago. As Roth observes, “slumping commodity prices” were a drag, too.

But if an investor got greedy when everyone else was frightened, if he got into Brazil during the impeachment proceedings, he reaped a great reward. For now “the Ibovespa is among the world’s top performing stock indices, witrh a 31% gain over the last year, doubling that of the MSCI Emerging Markets Index.”

Conclusion

South Africa is home to some fine companies, and they are, Roth says, “looking increasingly attractive for valuation-sensitive investors interested in emerging market stocks that still have plenty of upside potential.”

Also, South Africa (like Brazil) has an economy sensitive to commodity prices and those prices, to the benefit of both countries, are on the upswing.

 

 

 

 

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