When you are looking for consumer stock ideas in frontier markets, there is no better place than Africa. It is a continent of over 1 billion people, with the lowest penetration of modern consumer products and services of any region on the planet. For example, as seen in Chart 1, Africa has the lowest phone penetration of any region.
Accordingly, well-positioned consumer staples and consumer discretionary companies, if able to navigate some of the challenges in Africa, can compound growth for an extensive period, potentially leading to positive returns for shareholders. We witnessed this phenomenon over the past 30 years in more advanced emerging markets such as China, India and Brazil. Unfortunately, except in Nigeria and Kenya, there are currently few consumer companies listed on African exchanges. This is a core reason I frequently visit South Africa. It is also an advanced emerging market, and so has fewer domestic growth opportunities, but many consumer companies there have expanded north to redeploy their strong free-cash flow into higher-growth countries across sub-Saharan Africa.
Recently, I travelled to South Africa to meet companies following the election of Cyril Ramaphosa as president of both the incumbent ANC party and South Africa. The ANC party changed leaders because they realized a different approach was needed, their majorities having shrunk after each national and municipal election, as seen in Chart 2.
Since his election, President Ramaphosa has reshuffled his cabinet and presented what is considered to be a thoughtful budget, given South Africa’s fiscal constraints. His new cabinet includes respected people for the key finance and parastatal ministries. These changes are a breath of fresh air for CEOs in South Africa, after a long period of stagnation. As seen in Chart 3, most companies for the past five years have been allocating capital to international acquisitions in mostly developed markets, given low confidence in the domestic outlook, and to offset the weakening South African currency’s impact on profit growth.
The political change is critical for many South African businesses, because their sub-Saharan African operations had been quite strong, but the South African portion was challenged by a worsening economic and political backdrop that hurt consumer sentiment. Since the recent election, the outlook of most managements has become more positive, when compared with sentiment at a South African conference I attended in London in late November 2017. So it is reasonable to expect a return of confidence in South Africa that could cause an economic boom, similar to what we saw in India and France after the elections of President Modi and President Macron, respectively.
As well, in line with my 2018 frontier outlook, given its fiscal deficit, South Africa is likely to follow a similar reform path as other commodity-based emerging and frontier countries (Brazil, Argentina, Saudi Arabia, etc.) to privatize many government-owned companies. As discussed previously, these events have historically created attractive opportunities for private investors.
The bottom line is that I returned from my trip confident in the Fund’s South African holdings, as shareholders gain good exposure to the broader African consumer trends but also receive an improvement in the South African exposure of the Fund. In addition, most South African stocks remain off global investors’ radar, given the previous political issues and valuations, making them attractive for their improving fundamentals.
Thanks for reading,