Alex Davidson, Standard Bank, Global Markets Head of SA Clients
In the wake of global economic headwinds, eagle-eyed investors are turning to sector-specific quality assets in emerging markets to generate long-term, healthy returns. South Africa is one such example – the country’s diverse portfolio of investment sectors continues to provide a multitude of opportunities for local and Foreign Direct Investment (FDI).
South Africa-based companies account for 35 out of the 50 largest companies by US dollar turnover on the continent – the JSE playing host to pan-African giants like MTN, Naspers, Anglo American Platinum, Standard Bank, and Shoprite.
The country’s post-pandemic recovery enjoyed a positive outlook at the end of 2021, with the local JSE All-Share Index enjoying its best performance in more than a decade, with FDI inflow from across the globe being R27.2 billion in the same period, widening from R22.7 billion in the previous quarter.
The first half of the year also saw an uptick in mergers and acquisitions (M&A) activity in the region, with significant deals having already been announced, including a joint venture between Sanlam and Allianz; Digital Realty’s acquisition of a majority stake in Teraco; Suez’s acquisition of EnviroServ; Heineken’s acquisition of Distell and Namibian Breweries, as well as the recent acquisition of Ethos Private equity by US Asset Manager Rohatyn Group.
A large part of South Africa’s attractiveness as an investment destination is due to its highly favourable demographics which create a vibrant and upwardly mobile population. Furthermore, the country has also worked to strengthen investor protection, adopting stringent auditing and reporting standards, legal frameworks, and a robust fiduciary environment bolstered by a solid financial services sector.
Additionally, the country has a well-established and effectively regulated banking system characterized by well-regulated, highly capitalised, liquid, and profitable financial institutions which are supported by a robust regulatory and financial infrastructure. South Africa has sophisticated equity, insurance, and credit markets, bolstered by a robust savings industry and well-managed pension funds, which helped to earn the local financial sector its top-20 global rating as a financial hub.
But the investment landscape in the country is not without impediments.
Business and investor confidence have both taken a knock in recent months in the wake of global supply chain disruptions, skyrocketing inflation, and structural issues in electricity generation resulting in widespread loadshedding. The CSIR estimates that load shedding results in lost economic output of about R700-million per load shedding stage, per day – the cost to the economy estimated between R60bn and R120bn in 2019 alone.
Another challenge is the country’s dilapidated rail network which is forcing more freight onto the country’s already overwhelmed roads, increasing risk, and resulting in transit delays. South Africa’s rail network carried nearly 230 million tons of freight in 2017 and only 179 million in 2021, the lowest volume recorded over the past decade.
These are major deterrents for investors seeking opportunities in agriculture, agro-processing, consumer goods, retail, mining, manufacturing, and tourism – all of which are leading sectors in South Africa’s economy.
However, these challenges also bring future invest opportunities – especially in renewable energy and digitization.
25 renewable energy projects have been selected for development in the fifth bid window of the country’s Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which aims to secure more than 2,500MW of renewable energy primarily from onshore wind farms and solar photovoltaic plants.
As a testament to the appetite for sustainable energy solutions in South Africa, Standard Bank – for example – recently acted in its capacity as a mandated lead arranger and underwriter to support Scatec and H1 Holdings in bringing 3 renewable solar and battery storage projects valued at over R16 billion that each target 50MW of dispatchable generation capacity –these projects being the first of their kind to be financed in the country.
The carbon market in South Africa is also growing, with voluntary carbon credits directing private financing to climate-action projects that would not otherwise get off the ground. These projects support investment into the innovation required to lower the cost of emerging climate technologies.
We also project that South Africa’s technology, media, and telecommunication sectors are expected to see the most M&A activity in the foreseeable future, with investments in non-traditional sectors harnessed on digital infrastructure and Environmental, Social, and Governance (ESG) values.
Investors – especially foreign investors – are increasingly considering the long-term impact on the environment, society, and the performance of the businesses they are directing their money to. Being a responsible investor is surely gaining momentum in South Africa, with ESG factors being a mainstay in most valuations and portfolio formations. This is expected to be a recurring trend into the future and South African businesses will have to quickly adapt in order to stay relevant within the investor landscape.
South Africa has large market potential, well developed infrastructure, and a competitive domestic economy. The country’s democracy is well-established, and there is a strength within key institutions viz. the Judiciary and the Reserve Bank, which brings calm, confidence and reassurance to seasoned emerging market investors. As a productive pole, it is the most industrialised, technologically advanced, and diversified economy on the African continent. This makes the country an exciting investment destination for investors looking for long-term returns and impact investing opportunities.