The announcement that HSBC had terminated talks to purchase 70% of Nedbank was likened to being hit for six by an English batsman; it was quite unexpected and still difficult to rationalise after an extensive due diligence process.
Indeed, corporate South Africa had been on a winning streak as corporate raiders queue up to lay their hands over our prized assets in exchange for hefty premiums. Last year we saw record offshore flows into our equity markets with our bond market benefiting from over R60 billion (US$8.8 billion) in inflows year to date.
As the wall of cheap money started to wash up along our shores, the reality of the developed world’s situation has started to sink in. But is this newfound confidence in Africa sustainable or will it all come crashing down as the HSBC/Nedbank talks did? While foreign investment in Africa is encouraging, we should not forget one of the basic principles of investing: finding value where others have overlooked it.
With emerging markets acting as the global growth engine and multinationals repositioning their businesses to gain more exposure to growth markets in the BRIC (Brasil, Russia, India, China) economies, it is clear that we are heading towards a new era.
The marketing machines of many investment banks started to work overtime. Ke Nako! It is Africa’s time. We may have been left out of the BRIC acronym, but some have been quick to craft another, IBSA, after South Africa met India and Brazil in Brazil in April. I personally prefer the acronym BISAC even if requires SA to push out the Russians.
In an attempt to dress us up for sale, South Africa has even been merged with the rest of the Africa to create an African monolith. One billion customers; a land mass greater than the USA, China, India, and most of Europe combined; the bread basket of the world, with some of the most extensive mineral resources; and only lagging the growth rates of Asia and the Middle East for the past decade. What is there not to like about this new frontier market? However, buried in the footnotes are the old issues of red tape, infrastructure deficits, fragmented markets and low GDP per capita.
Was there ever a risk that as Africa’s largest economy, SA would not get its fair share of flows? There have been concerns that despite good fiscal discipline, foreign investors would shun us because of our pedestrian growth rate and mature consumer markets.
In fact, the concerns have been unwarranted with the currency strengthening to two year highs against the greenback despite attempts by the Reserve Bank to weaken it, and interest rates driven down to thirty year lows.
There have also been some great headline deals such as Japanese Telecommunication giant NTT making a cash offer for Dimension Data in July, another Japanese company, Kansai Paints buying a 25%stake in Freeworld Coatings who own the Plascon and Midas brands, and US retail giant Walmart setting its sights on Massmart in September offering over R30bn ($4.4 billion). I was privileged enough to meet Warren Buffett a couple of years ago and it was interesting to note that the one company from SA which he was complimentary about was Massmart. He doubled his stake in Walmart last year and I should have known then.
And finally there was HSBC, beating other rivals to enter into exclusive talks to purchase a majority stake in Nedbank. It seemed that the investment world was also reaping the dividends from the hosting of a successful soccer world cup when it showcased the grandeur and sophistication of our infrastructure; tangible proof of South Africa’s and Africa’s potential.
But is it now going to unravel? It is regrettable that the HSBC/Nedbank deal was still-born as it would have further strengthened our banking sector. It could well be that the global banks are not yet out of the woods when it comes to their capital position or that their return expectations are unrealistic.
Yet, this is not the first reversal in terms of corporate activity in SA. Already we have seen that the proposed RIO-BHP Billiton iron ore joint venture in Western Australia being scuppered by European regulators and the much talked about rival bid by Sinochem for Potash Corp, which is subject to a hostile bid by BHP Billiton, also looks like wishful thinking.
In South Africa, Baxter International did not take up its option to buy the rest of the share of their joint venture with Adcock Ingram in part of its hospital products division, after disputing the price; however, I don’t believe that this will completely quash expectations of further corporate action. Over the past year, the level of share ownership of many of our leading retail stocks has grown exponentially pushing valuations to extremes.
While the fundamentals in emerging markets are looking a lot more solid than that of the developed world, I am concerned that we are still faced with a basic supply and demand problem when it comes to investing in most of these markets. Many emerging markets are not deep enough to absorb the huge influx of new money. Brazil has twice now imposed a so-called Tobin Tax on inflows and this has hardly prevented the Real from appreciating. On the other hand, many investors view the developed world with suspicion, focusing on their poor fiscal position.
In 1895 Gustave Le Bon, the French philosopher, warned in his book “Psychologie des foules” (Crowd Psychology) that individuals can easily be swept by the collective in believing that what a greater group is doing is right. As value investors at Sanlam Investment Management, we focus on the fundamentals of the companies. For example, we are taking advantage of the strong Rand to invest in beaten down developed markets where valuations are at record lows. There is no doubt that may more articles will be written over the coming years about emerging markets, but this does not mean that one should abandon basic principle of buying assets trading at low valuations.
Patrice Rassou is a senior portfolio manager at Sanlam Investment Management