South Africa: Don’t Let a Country’s Reputation Fool You by Ted Baumann, The Sovereign Investor
Johannesburg, South Africa — In search of some investment opportunities in South Africa, I winged my way from Atlanta to this city perched on the cool southern African highveld.
South Africa is one of the “BRICS” countries — including Brazil, Russia, India and China — that are said to represent the next wave of global economic power. They’re all large, diverse economies with varying patterns of integration into global markets. All seek to attract investors with promises of solid real returns.
Each pursues a slightly different strategy. China’s role as the world’s low-cost manufacturing powerhouse is well-known. Russia supplies energy to Europe and Asia. India is all about high tech and services, whilst Brazil specializes in agriculture and manufacturing. South Africa is … well, I’ll get to that in a moment.
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
All of these countries, however, probably wish they had the reputation amongst investors enjoyed by a tiny group of islands in the Caribbean … one not too far from you.
Too Big to Succeed?
The Cayman Islands was recently ranked amongst the world’s top 20 investment destinations by Foreign Direct Investment magazine, fDi Intelligence. It didn’t get there by being a manufacturing, tech or agricultural powerhouse. It just pursued a consistent strategy of free-market policies and a focus on world-class, private and secure financial services — services that, in fact, act as gateways to other investment destinations, like the BRICS countries.
So why doesn’t everybody do that?
One of the curiosities of modern financial commentary is the regularity with which writers compare countries as if they all have fundamentally the same choices. For example, an article might praise the Cayman Islands for its wonderful policy framework, and tut-tut over the failure of a country like South Africa to follow suit — the implication being that if only the latter did the same, it too would enjoy Cayman-like success.
The problem is that the options available to a small Caribbean island with few inhabitants, no industry, little poverty and powerful friends in Europe and North America aren’t the same as those open to a big post-colonial African country with a complex economy, massive inequality and divided loyalties.
The Caymans government can adopt all the free-market policies it desires because it can only make things better for its inhabitants. South Africa doesn’t have that luxury. Free markets there generate losers as well as winners, especially amongst those deliberately disadvantaged by apartheid.
Big, complex countries such as South Africa — or the U.S., for that matter — face more constraints and enjoy fewer options than small, simple places. Investment-friendly islands like the Caymans, Jersey or the Isle of Man can easily skim off a bit of the cream from their financial sector and use it to keep everyone on the island happy, without offending markets.
South Africa, by contrast, has tens of millions of inhabitants with diverse needs and expectations, and its very stability depends on the government’s ability to “be seen” addressing them. China and India are in the same boat. Fully free and open markets wouldn’t last long in the face of popular pressure to divert resources more widely. Paradoxically, to attract investment, they have to use taxation and redistribution to keep the peace.
Being big, in other words, has its disadvantages.
Profit Knows No Ideology
South Africa has a comparative advantage in heavy engineering, mining, logistics, regional trade and transport services. It also has Africa’s most dynamic and profitable retail sector, which it is exporting to the rest of the continent. Cayman-style finance cannot survive here.
Looking around Johannesburg and Pretoria, the capital, it’s immediately apparent that lots of money is being made here, despite the government’s reputation as a “social democratic” spendthrift. Indeed, despite the government’s interference in some aspects of free markets — indeed, probably because of it — it is preserving the long-term possibility of real growth and profits in a way that Zimbabwe, its decrepit neighbor to the north, isn’t.
And yet you’ll never find South Africa on anybody’s top 10 list of investment destinations. At least not the run-of-the-mill ones.
It’s increasingly clear to me that investors looking for solid returns need to do more than follow think-tank rankings of “economic freedom” that generally reflect more ideology than substance, more wish-list than solid research. There’s a reason why Jeff Opdyke looks to China for some of the best investment opportunities around while Wall Street is staying away. Our “on the ground” approach to uncovering the best investments the media pundits aren’t telling you about keeps you ahead of the crowd.
I’m going to be poking my nose into some investment opportunities in South Africa while I’m here, such as hidden gems in real estate and other non-tradable sectors. I’m pretty sure they won’t be making any of the “economic freedom” lists, but the potential returns will surprise you.
Offshore and Asset Protection Editor