ADRIAN SAVILLE: South Africa is rich with possibility

Over the past three years I have taught courses in emerging-market strategy and finance at the Rotman School of Management in Canada. During visits to Toronto, I was struck by the cost of living.

Almost everything is expensive. A canteen lunch at the business school quickly adds up to a few hundred rand, and you’d be lucky to get an evening out for under C$100. From meals to housing, price tags are big. For a 200m² midtown home, you will need to fork out somewhere north of C$1m. That’s R13m.

This simple — if scary — exercise helps explain why I think South Africa is rich with opportunity, and at a point where our economy may surprise on the upside under a newly forged government of national unity (GNU).

For starters, my Toronto experience highlights the importance of buying power. The rand is one of the most compellingly priced currencies. If you lived on Mars and were to buy assets anywhere in the world with your Martian metical, you don’t go for the Canadian dollar. You go hunting in places like South Africa, Argentina and Turkey.

The GNU is also less of a shock than many believe, for at least two reasons. First, we’ve had a coalition government for 30 years. The ANC has governed with partners including Cosatu, the SACP, the ANC Women’s League and the ANC Youth League since coming to power in 1994. The new-look GNU is more fragmented, but it isn’t a totally novel arrangement.

Second, we’re hardly unique. Coalition governments are emerging around the world. Many are faring less well than us. In India, Narendra Modi’s Bharatiya Janata Party was set to win re-election but landed up with just 240 seats in the 543-seat parliament. France has just gone through a snap election that resulted in a coalition government. And in Mexico, Claudia Sheinbaum was recently elected as the country’s first woman president. The Mexican peso revolted and fell from 17/$ to 19/$ in 10 days. So, the Mexican voters wanted this; capital markets didn’t.

Next is the oft-forgotten fact that a great investment is very different from a great business.

Nvidia, Microsoft and Apple are great businesses. But together they have a market capitalisation of $9.2-trillion, which is greater than China’s entire stock market. Given the option, I’d rather own “all of China” than three firms. Always and everywhere, the difference between a great business and a great investment sits in one word: price.

Let’s apply this thinking to South Africa, beginning with the currency. Using purchasing power parity, fair value for the rand is closer to R15/$ than R25/$.

I also expect upcoming tailwinds for the rand. While the stage is set for interest rate cuts by the Reserve Bank, the US Federal Reserve is likely to cut faster and further. All else being equal, that should be good for the rand.

Then there are some boons we don’t hear about enough. Our Sub-Saharan neighbours Rwanda and Ethiopia are growth stars, ranking as the two fastest-growing economies in the world over the past 20 years. Kenya, Namibia and Mozambique also have great potential. South Africa’s sophisticated economy can participate in unlocking prosperity with this fast-growing neighbourhood.

Commodities continue to drive our economy in a world that shows little sign of giving up its habit of consuming them. Couple that with evidence that Eskom and Transnet may well be levelling out and improving capacity and efficiency. As I write, we are on day 121 of uninterrupted energy supply. Public-private partnerships taking shape are playing a pivotal role in this improved landscape.

Finally, turn to the financial fulcrum of our economy. The JSE has performed poorly for an extended period. Investor disappointment has translated into delistings. Looking at company balance sheets, there is capital to be deployed and strong, experienced management teams behind them.

Peter Lynch, who managed the Magellan Fund at Fidelity Investments between 1977 and 1990 with a return of 29.2% a year, said if you find a company on a dividend yield higher than the p:e, buy as much of it as you can.

A study of the industrial and financial sector of the JSE shows more than one in 10 firms are trading on Lynch-type multiples. The opportunity is rich.

* Saville holds a professorship in economics, finance & strategy at the Gordon Institute of Business Science, where he is the founding director of the Centre for African Management & Markets