Getting in on the ground floor

Black Enterprise, May, 1995 by Gracian Mack

Investing in the new South Africa is not for the faint of heart. The value of your investment holdings could go through the roof--or the bottom could fall out.

TEN YEARS AGO, YOU COULDN'T HAVE BET A PLUGGED NICKEL on a wildebeest race in South Africa. Today, however, financial market players can cash in on a plethora of investment opportunities that have emerged from the ashes of a crumbled apartheid. But if you're thinking President Nelson Mandela's new South Africa is an investment panacea--think again.

"Sure, there are plenty of opportunities to make money, but traditional emerging market risk--losing investment value as a result of currency devaluations, political instability and, of course, making the wrong kind of investment--could sour your portfolio," says Judith Aidoo, president of The Aidoo Group. "You should not go into South African investments on emotional impulse," says Aidoo, who advises cash strapped governments in Africa. "Sticking with the fundamentals and doing your homework will cut down the risk."

As Aidoo points out, there are common risks associated with all emerging markets. However, there are degrees of risk assigned to different markets and investments.

As far as South Africa is concerned, the perception of the new democracy as a viable investment opportunity has improved dramatically in the past year. Two of the major credit rating agencies have expressed a middle-of-the-road confidence in South Africa. Standard & Poor's and Moody's Investors Service have ranked the sovereign debt of South Africa "BB" and "Baa3," respectively. The designations from these two New York agencies rank South Africa's debt predominately speculative. "But, the outlook is better than in Mexico," says Aidoo.

Analysts' statistics on how individual investors are dealing with the positive outlook aren't available yet, but institutional interest appears to be growing.

According to the Investor Responsibility Research Center, a Washington-based research firm, by the end of the third quarter of 1994, more than 20 U.S. public pension funds and other institutional investors had shifted assets into the country. Executives at California Public Employees Retirement System (CALPERS) have said they are slowly reinvesting some $5 billion in South African stocks and bonds that it had withdrawn during the apartheid years.

Meanwhile, Morningstar Inc., a Chicago-based research company, reports that at least 15 open-end mutual funds have taken new positions in South African securities.

Caution: The aforementioned are a brazen bunch of sophisticated investors who revel in risk. They have taken their chances in Mexico, Venezuela and Korea, and they are fully aware that the same potential for loss exists in their new ventures in South Africa. And, as eager as some arc to pump seed capital into the country, other investors are holding back.

INVESTING IS RISKY BUSINESS

Among the major concerns was South Africa's retention, until earlier this year, of a dual currency--the financial rand and the commercial rand.

The financial rand was created when economic sanctions cut off South Africa from the world. A complex financial mechanism, the "fin" rand was designed to attract foreign investment into the country and make it costly to take it out. The fin rand was used primarily for financial transactions-buying and selling stocks and bonds. The commercial rand, on the other hand, was for trading of goods and services.

According to research reports from Robert Fleming Inc., a London-based investment banking house, the gap between the two currencies loomed as large as 20% at the beginning of the fourth quarter of 1994. However, in March, Mandela's administration ended the dual currency system by getting rid of the fin rand. "With the dismantling of apartheid and the lifting of economic sanctions, there is no longer any need for the fin rand," says Fleming vice-president John Balfe.

ANOTHER PROBLEM

The interlocking structure of South Africa's stock market presents another hurdle to investing there, says Sean O'Connor, managing director of Standard Bank Group, one of the top four banks in South Africa.

The pre-Mandela government created a stock market structure where six holding companies control approximately 87% of the Johannesburg Stock Exchange. The six are: Anglo-American Corp., with control of over 43% of the listed companies; Rembrandt Group with 13%; Sanlam with 10%; South Africa Mutual with 10%; Liberty Group with 7%; and Anglovaal Group with 4%.

These holding companies, says O'Connor, exist in a maze of share ownership, and cross directorships, which in turn has produced a myriad of subsidiaries. These companies have interests in every facet of the South African economy, from precious metal mining to life insurance and the export/mining business. Of the 654 companies listed on the exchange, only about 7% actively trade; hence, the lack of liquidity in the market.

Under Mandela, these companies are being pressured to participate in "unbundling" their tightly held holdings, says Wallace Ford II, a former deputy Commissioner of the New York State Department of Commerce. "They are selling off non-core business and thereby creating opportunities for qualified buyers," adds Ford, now a partner in the New York law firm of Marks & Murase.