European woes, African opportunities

An economic crisis looming in Europe means bad news for South Africa, given the country’s reliance on exports to the continent. Along with concerns of a second wave of economic crisis, the resilience and growth of emerging markets lends itself to some bullishness for those focused on trade with Asia, Africa and Latin America.

Predictions from private banks through to the International Monetary Fund (IMF) underscore growing opportunity in the shift from traditional trading partners that have not demonstrated African resilience to global economic woes.

However, Juan Nevado, fund manager at the Macro Investment Team at M&G Investments, the global investment arm of the Prudential Group, says the current environment offers certain opportunities globally. “From our dispassionate observation of the global facts, we can say that in spite of Europe’s recessionary woes, this is, in fact, not a bad environment for risk assets, despite what the markets seem to be discounting,” he told Opportunity. He advised investors and companies to take a long-term view.

“The ongoing European sovereign-debt saga is hurting the growth outlook for the African region and weighing on the exports of the European Union’s key trading partners,” added Nevado.

On the subject of America, chief economist at First National Bank Cees Bruggemans said that major fiscal austerity will grip the United States as politicians there attempt to eliminate its budget deficit and arrest its debt spiral. However, the US economy will probably continue growing, if only
modestly at 2%-3% .

He added that Europe and the euro are not expected to implode – no one may, after all, leave the euro – even though speculation on this score remains rife.

The good news is that the IMF forecasts a rosy outlook for sub-Saharan African growth in 2012, but warnings of significant risks from global financial volatility that could subdue demand and private inflows into the world’s poorest continent have been issued.

“Growth in sub-Saharan African economies will remain on average above 5% in 2011. The growth rate is expected to increase in 2012 to nearly 6% because of once-off boosts to production in a number of countries,” says the IMF, whose projections were reported by Reuters.

The Fund is urging policy-makers on the continent to formulate policies that take into account the projected strong growth as well as emerging challenges from the global financial problems – an issue that political leaders in Nigeria and South Africa have not been shy to pronounce upon.

“Policies need to tread a fine line between addressing the challenges posed by strong growth, and preparing to ward off the potentially adverse effects of another global downturn,” said Antoinette Sayeh, director of the IMF’s African department.

“In South Africa, with unemployment stubbornly high, growth will be limited to, at most, 3.5% this year.” She added, however, that volatility in commodity markets could cause further disruptions.

Given the prospects in Europe, some moderate outlook for the US and sustained bullishness on emerging markets, the shift to BRICS is was indicated by the latest plan for a BRICS index announced at the 51st annual general meeting of the World Federation of Exchanges (WFE), the most recent gathering to date held in Johannesburg during the second half of last year.

The exchanges of the BRICS emerging market bloc have secured a joint initiative to expose investors to these dynamic economies. Initially the exchanges, which accounted for over 18% of all exchange-listed derivative contracts, traded by volume worldwide as of June last year, will cross-list benchmark equity index derivatives on the boards of each of the other alliance members, according to the Johannesburg Stock Exchange.

Seven exchanges represented translate to a combined listed market capitalisation of US$9.02 trillion, equity market trading value/month of US$422bn and 9 481 companies listed.

“Global investors are increasingly seeking exposure to leading developing markets,” said Ronald Arculli, chairperson of Hong Kong Exchange and Clearing and of the WFE. “The close relationship of the BRICS stock exchanges is behind this initiative, through which investors worldwide will gain easier access to benchmark equity index derivatives, which will now be offered in local currency on these exchanges. These cross-listings are planned to take place by June 2012.”

While equities are highlighted under the new exchange, the potential of that famous commodity gold still stands. International investment guru Doug Casey, who spoke at the Freedom Fest convention attended by Opportunity in Las Vegas, says he would not be surprised if the gold price hits $5 000 an ounce in the next couple of years, as paper currencies in the US, Europe and Japan drop in value.

At home, the good news is that South African lenders are hiring more staff to target the country’s poorest people as banks from New York to London slash jobs to cut costs – a trend picked up by international market informers.

Renee Bonorchis of Bloomberg notes employment in financial services climbed for a fourth consecutive month in November, “Rising 0.7% to 1.63 million, according to an index compiled by Johannesburg-based recruitment company, Adcorp Holdings Ltd.

“The story is about banking the unbanked,” said Adcorp’s labour economist Loane Sharp in an interview from Johannesburg. “Banking services to the consumer are growing enormously with non-traditional offerings from the four biggest banks,” he told Bloomberg.

South Africa’s banks are targeting the nine million South Africans unbanked, as growth in the continent’s biggest economy is forecast to accelerate next year. Sunday trading and mobile banking have helped accelerate the growth.

While commodities have boosted Africa with demand from emerging markets, it is clear that financial services and equities markets have high potential. The culmination of a pooled BRICS index coupled with massive growth in banking the unbanked showcases the fact that millions of consumers outside the formal market economy stand to enter it in the years ahead. It is good news for critics who say Africa’s unprecedented growth, while good, has been overly reliant on demand for commodities.

While Africa did not emerge from the global economy unscathed, but did relatively well given the international context, ABSA CEO Maria Ramos, touted as one of the world's most influential business leaders, told McKinsey Quarterly that more can be done, with some positive signs already emerging showing that attention is being paid to particular issues affecting Africa: “In many countries, there is absolutely no doubt that the focus continues to be, and will remain for some time, on commodities. But we also need to understand that it’s not just the commodity endowment that is
driving the potential of those economies.

“It’s also what’s happened in the last decade and a half around the investment in people, systems, and social and physical infrastructure, as well as increasing government stability and sounder fiscal policies. Those moves are beginning to pay dividends.”

A commodities boom is by no means the only cause for accelerated African growth. Growing markets of consumer power at home, with companies enjoying access to emerging economies abroad, combined with a greater conglomerated power across seven combined stock exchanges, offer new opportunities for 2012.

Inevitably, this will likely incentivise fresh opportunities, with woes in Europe promoting renewed commitments by policy-makers and business to solidify strong trade ties with booming markets – paving the way for greater trade integration and diversification across the global economy. In the bigger picture, it makes for greater stability.

Garreth Bloor