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South Africa: A Glass Half Empty Or Half Full?

Oct. 05, 2012 2:05 PM ETAFK, EZA, WMT, YUM14 Comments

In a recent article I wrote, published on Seeking Alpha, I made the case for investing in South Africa based on the following positive attributes of the South African market:

1) South Africa is a gateway to sub-Saharan Africa.

2) There is a large, underutilized labor pool that could transition from the informal to the formal (investable) economy.

3) The country has a modest to high savings rate.

4) The business culture is improving, based on metrics such as ease of doing business, competitiveness, and level of corruption.

5) Investment returns have been attractive over the last decade. Though no guarantee of future results, they may indicate that the above factors have contributed to investor success and continued improvement should bode well.

Several readers commented on the fact that South Africa's economy is a classic case of the glass-half-full, glass-half-empty scenario. In my view, South Africa is on an upward trajectory, but I agree that there are several points in the road where it could take a wrong turn. It is incumbent upon the investor to recognize when a wrong turn is made and when such a turn leads to a minor delay or a less favorable trajectory. On balance, I am hopeful that South Africa can stay on the road to prosperity. And even if it detours, I think the number one reason for investing in South Africa is the access it affords to growth outside of its borders.

Receding Headwinds

During the last decade, South Africa's GDP growth rate averaged 3.5% (World Bank). For 2012, South African GDP growth is pegged at just under 4%, compared to 5.8% for Africa as a whole (IMF). This growth has been achieved despite having the largest HIV/AIDS population of any country in the world. In 2007, 18% of people aged 15-49 was HIV positive, vs. a sub-Saharan Africa average of 5% (World Bank Indicators 2010). Though

This article was written by

Jan Schalkwijk, CFA is a portfolio manager at Africa Capital Group, where he performs research on African equities and manages Africa-focused portfolios.

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