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Will South Africa’s Struggles Overshadow its Potential?

October 12, 2012

Throughout its history, South Africa has faced some unique and often divisive social and economic challenges. But it is also a country that has proven able to reinvent itself politically and economically. While significant social and economic problems still persist today, I believe South Africa and its people appear potentially well positioned for greater long-term prosperity.
-Mark Mobius, executive chairman,Templeton Emerging Markets Group

Africa is a continent many investors bypass, but from my perspective as a long-term investor, I think that’s a mistake. South Africa has faced some struggles recently, but I think they can be overcome, and a brighter future could be ahead there for its people. South Africa is the largest economy in Africa, and is the only country on the continent where I think the “frontier” market label doesn’t apply. Some have added an “S” to the end of the “BRIC” acronym to include South Africa in the grouping of emerging market economies of Brazil, Russia, India and China. Others include South Africa as part of a newer grouping of younger, diverse emerging markets comprised of Colombia, Indonesia, Vietnam, Egypt and Turkey (the “CIVETS”). Whichever label you use, many investors have recognized South Africa’s power and potential in the emerging markets world.

I’ve invited Johan Meyer, our SVP and managing director, South Africa, based in Cape Town, to share some of his insights on the challenges and opportunities facing South Africa today.

Johan Meyer

Throughout its history, South Africa has faced some unique and often divisive social and economic challenges. But it is also a country that has proven able to reinvent itself politically and economically. While significant social and economic problems still persist today, I believe South Africa and its people appear potentially well positioned for greater long-term prosperity.

Commodities, particularly metals and minerals, are very important to South Africa’s economy. South Africa is one of the world’s leading mining and mineral processors, with roughly three-quarters of the world’s platinum production and a significant share of others including palladium, gold, manganese and diamonds.1 Strikes in South Africa’s mining industry have certainly been receiving a lot of press coverage recently, including events at one of the largest platinum mining companies in the world which really brought to light the harsh conditions these miners endure. We have begun to see some progress being made toward achieving resolutions to the disputes, including wage increases that will hopefully end the violent protests. Still, from now on we expect investors to focus on labour relations in much more detail, especially considering the spread of the strikes to other industries and the potential impact thereof on economic activity across the country.

While the strikes haven’t had a marked impact on the equity market as a whole, we believe it will be important to achieve the right balance between corporate performance, executive compensation and wages going forward. The longer these strikes continue, the more pronounced the impact could be on corporate performance, with knock-on effects likely being felt in state income (tax revenues) and consumer spending power. It is therefore imperative that a solution is found to this issue as soon as possible.


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