Africa May 2013
01 April 2013 - Peter Leger
While our Africa funds are not directly accessible to individual investors, they are used as underlying building blocks in some of our managed funds, namely Coronation Market Plus and Coronation Balanced Plus.
We’re increasingly fielding questions as to whether Africa is overhyped. Has the pendulum swung from Afro-pessimism to fever pitch Afro-optimism? And where does the point between perception and reality lie? The cynics correctly point out that while Africa has had a good, no, make that great, ten years and carries strong momentum, it’s really all about commodities. That, through this decade of boom, there are relatively few signs of economic diversification which allows for domestic-led growth and industrial manufacturing.
We concede the above points and, while eloquently put, the argument misses much in its brevity. The first point to make is that when building countries and economies, ten years is but a flash. And while we anchor our view of commodities in cycles and supercycles, in doing so we risk missing secular changes that set the scene for a very different growth trajectory.
In discussing this, allow me to reference the longest cycle that I have experienced firsthand – my life. I grew up in a small Free State mining town called Virginia, which was born of the Free State Goldfields. Gold was first found in the area in 1949, making it a relatively young town of 63 years old. Harmony Gold Mine, having been named after one of the suburbs (a term used generously in this instance), would be the best known of Virginia’s offspring. Growing up in Virginia came with all the fun and friction of a frontier town and the populace was highly nomadic. Today, the town is in serious decline – partly due to much of the gold having been mined out with little economic diversification, and partly due to poor administration and service delivery.
Over 55 years, my father, then followed by my brother, built a successful industrial business in Virginia. Today it employs over 100 people and supplies companies globally with the production still based in Virginia, and having survived the challenges that half a century of doing business in South Africa could present. The business is as financially successful as ever, completely independent of the mines yet closer to the brink of extinction than ever. Why is this? Municipal administration is in disarray. Despite local users having fully paid up electricity bills, the failure of the Matjebeng municipality to pay Eskom for a number of years has now resulted in Eskom threatening to cut supply. This goes for water too. Service delivery failure has given rise to increasing social unrest and violent demonstrations – manifestations not unique to Virginia.
We used to holiday in the northern Drakensberg, a world heritage site, with a number of resorts to choose from. Anyone who has been there can attest to the incredible majestic beauty of the area, and I’ve often wondered why the area doesn’t feature today as a more popular destination. Having driven through the area more recently, it’s clear why. The road accessing the area has been allowed to decline to a state well below that of what we see on the rest of the continent. Access has been made virtually impossible and tourism numbers have dropped accordingly. The most recent casualty has been Little Switzerland, a resort which closed with the loss of 150 jobs and the end of a 165-year history. It’s a 15 km stretch of road that falls under the responsibility of the Free State. Having been awarded a road building tender three years ago, the contractor stopped work due to non-payment and today 8 000 tourism jobs are on the line.¹
But you may well ask, why the trip down ‘pot-holed’ memory lane? Focusing on macro statistics and broad economic numbers can hide and obscure specific trends. Poor management and governance can quickly undo many years of hard work and effort. Just ask your average hard-working Cypriot. What we are increasingly witness to across the continent is the reverse of this, where local management and governance is improving steadily and allowing markets to operate more freely. The fact that this might be off a low base makes dramatic improvements that much easier. Facilitating markets and improving ease of business can be as constructively powerful as the destructive nature of poor management.
It’s striking how visible the improvements are with each trip we do to different African countries. Lagos is a case in point, where five years ago it could sometimes feel that one was on the set of a Mad Max movie. Today, road conditions have dramatically improved, traffic is orderly, and the overall travel experience has improved. Hotel quality and choice is far greater. Banking sophistication and product options have grown. General feedback of the city administration has improved and the presence of many more multinationals across industries talks to the deepening of the economy. There is a lag to picking this up in economic numbers and ‘ease-of-business’ surveys. But we can see it happening and we can see the benefits to businesses operating there.
There is a general perception that investing in African countries is risky. Our sense is that risk is more a function of what you pay for something, relative to the risk. Buying a house that has been condemned with this reflected in the valuation, is far less risky than buying a great house that subsequently risks being condemned. Investors in parts of Europe have learnt this lesson the hard way. We think that many things can still go right in the African companies and countries we invest in relative to what can go wrong. Closer to home and in a number of developed markets, the same cannot be said with comparable conviction.
1 Damaged road threatens tourism, Financial Mail, 12 March 2013
PETER LEGER joined Coronation in April 2005 as a portfolio manager. He has 14 years’ experience in the financial markets in Africa as both a portfolio manager and research analyst. Peter currently heads up the Africa ex-SA unit for Coronation, which includes the Coronation All Africa and Coronation Africa Frontiers funds.
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Notes to the editor:
Coronation Fund Managers Limited is one of southern Africa’s most successful third-party fund management companies. As a pure fund management business it provides individual and institutional investors with expertise across Developed Markets, Emerging Markets and Africa. Clients include some of the largest retirement funds, medical schemes and multi-manager companies in South Africa, many of the major banking and insurance groups, selected investment advisory businesses, prominent independent financial advisors, high-net worth individuals and direct unit trust accounts. We are 29% staff-owned, have offices in Cape Town, Johannesburg, Pretoria, Durban, Gaborone, Windhoek, London and Dublin and are listed on the Johannesburg Stock Exchange. As at the March 2013 quarter-end, assets under management total R409 billion.